nep-upt New Economics Papers
on Utility Models and Prospect Theories
Issue of 2005‒12‒14
four papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Reserve prices in auctions as reference points By Stephanie Rosenkranz; Patrick W. Schmitz
  2. Efficiency of Competition in Insurance Markets with Adverse Selection By Giuseppe, DE FEO; Jean, HINDRIKS
  3. Risky Arbitage, Asset Prices, and Externalities By Cuong Le Van; Frank H. Page, Jr.; Myrna Wooders
  4. Another View of the J-Curve By Olivier, CARDI

  1. By: Stephanie Rosenkranz; Patrick W. Schmitz
    Abstract: We consider second-price and first-price auctions in the symmetric independent private values framework. We modify the standard model by the assumption that the bidders have reference-based utility, where a publicly announced reserve price has some influence on the reference point. It turns out that the seller’s optimal reserve price is increasing in the number of bidders. Also in contrast to the standard model, we find that secret reserve prices can outperform public reserve prices, and that setting the optimal reserve price can be more valuable for the seller than attracting additional bidders.
    Keywords: Auction theory; reference-dependent utility; reserve prices
    JEL: D44 D81 D82
    Date: 2005–09
  2. By: Giuseppe, DE FEO; Jean, HINDRIKS (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
    Abstract: There is a general presumption that competition is a good thing. In this paper we show that competition in the insurance markets can be bad when there is adverse selection; Using the dual theory of choice under risk, we are able to fully characterize both the competitive and the monopoly market outcomes. When they are two types of risk, the monopoly dominates competition if and only if competition leads to market unravelling. When there are a continuum of types the efficiency of competition is less trivial. In effect monopoly is shown to provide better insurance but at the cost of driving out some agents from the market. Performing simulation for differnt distributions of risk, we find that monopoly in general performs (much) better than competition in terms of the realization of the gains from trade across all traders in equilibrium. The reason is that the monopolist can exploit its market power to relax the incentive constraints
    Keywords: monopoly; competition; non-expected utility; insurance; adverse selection
    JEL: G22
    Date: 2005–07–15
  3. By: Cuong Le Van (CNRS, CERMSEM, University of Paris 1); Frank H. Page, Jr. (Department of Finance, University of Alabama); Myrna Wooders (Department of Economics, Vanderbilt University)
    Abstract: We introduce a no-risky-arbitrage price (NRAP) condition for asset market models allowing both unbounded short sales and externalities such as trading volume. We then demonstrate that the NRAP condition is sufficient for the existence of competitive equilibrium in the presence of externalities. Moreover, we show that if all risky arbitrages are utility increasing, then the NRAP condition characterizes competitive equilibrium in the presence of externalities.
    Keywords: Risky arbitrage, competitive equilibria, viable asset prices
    JEL: C62 D50
    Date: 2005–09
  4. By: Olivier, CARDI
    Abstract: We use a two-good dynamic optimizing small open economy model to provide a new explanation of the J-Curve phenomenon in terms of habit persistence in consumption and sluggishness in capital adjustment. The results differ markedly depending on the permanence or temporary nature of the relative price change. A short-lived terms of trade worsening may lead to a once-for-all decrease in the marginal utility of wealth and to higher steady-state values of the habitual standard of living, the real expense, and the net foreign assets through the combination of intertemporal speculation, inertia, and hysteresis effects. Investment and real expense folow non-monotonic transitional paths and current account dynamics are driven by new forces. In accordance with recent empirical results, investment is procyclical, trade balance deteriorates initially, net foreign assets adjustment exhibits a J-Curve, and the current account surplus phase is associated with a fall in real income.
    Keywords: Current account; Habit Formation; Temporary Shock; J-Curve
    JEL: F41 E22 E21 F32
    Date: 2005–06–15

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