nep-upt New Economics Papers
on Utility Models and Prospect Theories
Issue of 2005‒11‒12
five papers chosen by
Alexandr Harin
Modern University for the Humanities

  1. "The Disutility of International Debt: Analytical Results and Methodological Implications" By Greg Hannsgen
  2. A Rational Irrational Man By Alexander Harin
  3. Money and Monetary Policy in Stochastic General Equilibrium Models By Arnab Bhattacharjee; Christoph Thoenissen
  4. Health and Infrastructure in Models of Endogenous Growth By P R Agénor
  5. An Economic Model of Youth Smoking: Tax and Welfare Effects By Steven M. Suranovic

  1. By: Greg Hannsgen
    Abstract: In dealing with the problematic relationship of morality to rational choice theory, neoclassical economists since Lionel Robbins have often argued that they can incorporate moral values into consumer theory by putting those values into the utility function. This paper tests the viability of such an approach in the context of international finance. The moral value at stake is autonomy, which may be lost when borrowers must submit to the edicts of international financial institutions. When such a value is inserted into the utility function of a small economy, the growth rate of consumption and the level of investment change. Furthermore, potential borrowers may lose their ability to credibly commit to paying back loans, resulting in a complete absence of borrowing where it might otherwise take place. The author argues that while this model illustrates the possibility of analyzing a noneconomic value (sovereignty) through rational choice theory, it also shows that standard methods of empirical inference, policy evaluation, and welfare analysis may fail in such a situation. To answer questions that mix morality and economics, economists must seek tools other than conventional rational choice theory.
    Date: 2005–04
  2. By: Alexander Harin (Modern University for the Humanities)
    Abstract: A man is a key subject of economics and economic theory. “A man is irrational” - this opinion can be made from Allais paradox, risk aversion and other well-known fundamental problems. For a long time, this opinion was a barrier to proper solution of these problems and the development of the economic theory. A radically new approach has been proposed. It considers arrangement infringement possibility as a quite different source of such problems. It opens a quite different way to solve them and remove this barrier. It helps economists to open new and rediscover old fields and trends for the research.
    Keywords: “non-ideal” economics, risk, market, bank, industry, development
    JEL: C C7 D81 G11 G22 H O
    Date: 2005–11–09
  3. By: Arnab Bhattacharjee; Christoph Thoenissen
    Abstract: We compare three methods of motivating money in New Keynesian DSGE Models: Money-in-the-utility function, shopping time and cash-in-advance constraint, as well as two ways of modelling monetary policy, interest rate feedback rule and money growth rules. We use impulse response analysis, and a set of econometric measures of the distance between model and data variance-covariance matrices to compare the different models. We find that the models closed by an estimated interest rate feedback rule imply counter-cyclical policy and inflation rates, which is at odds with the data. This problem is robust to the introduction of demand side shocks, but is not a feature of models closed by an estimated money growth rule. Drawing on our econometric analysis, we argue that the cash-in-advance model, closed by a money growth rule, comes closest to the data.
    Keywords: Intertemporal macroeconomics, role of money, monetary policy, model selection, moment matching.
    JEL: C13 E32 E52
    Date: 2005–10
  4. By: P R Agénor
    Abstract: This paper studies the optimal allocation of government spending between infrastructure and health (which affects labor productivity as well as household utility) in an endogenous growth framework. A key feature of the model is that infrastructure affects not only the production of goods but also the supply of health services. The first part considers the case where health enters as a flow in production and utility, whereas the second focuses on a "stock" approach. Growth- and utility-maximizing rules for output taxation and the allocation of public spending are derived. It is shown, in particular, that the welfare-maximizing share of spending on health exceeds the growth-maximizing share.
    Date: 2005
  5. By: Steven M. Suranovic (The George Washington University)
    Abstract: This paper presents a model of smoking choice in which rationality is bounded by limitations in intertemporal computational abilities. The model is applied to the youth decision to initiate smoking. Lifetime smoking paths of representative smokers indicate that youths may experience a reduction in lifetime utility and come to regret their decision to smoke. It is suggested that public policy interventions that raise the near term cost of smoking will be more effective in reducing lifetime smoking than informational campaigns that emphasize future health costs. However, youth taxes would have to be quite high to substantially reduce smoking rates among youths who have already begun to smoke. Also, low youth taxes would not prevent future smoking as an adult, although they would reduce smoking rates and lead to earlier quitting.
    Keywords: Cigarettes, smoking, addiction, Behavioral economics
    JEL: I12 D11 D60 D91
    Date: 2005–11–08

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