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on Utility Models and Prospect Theories |
| By: | Lilia Maliar (Universidad de Alicante); Serguei Maliar (Universidad de Alicante) |
| Abstract: | This paper studies the properties of the social utility function defined by the planner's problem of Constantinides (1982). We show one set of restrictions on the optimal planner's policy rule, which is sufficient for constructing the social utility function analytically. For such well-known classes of utility functions as the HARA and the CES, our construction is equivalent to Gorman's (1953) aggregation. However, we can also construct the social utility function analytically in some cases when Gorman's (1953) representative consumer does not exist; in such cases, the social utility function depends on "heterogeneity" parameters. Our results can be used for simplifying the analysis of equilibrium in dynamic heterogeneous-agent models. |
| Keywords: | Aggregation of preferences, Planner's problem, Social utility function, Social welfare, Gorman aggregation |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2005-25&r=upt |
| By: | André De Palma; Nathalie Picard |
| Abstract: | We study the impact of information on risk adverse drivers who maximize their von Neumann and Morgerstern expected utility (rather than minimizing expected travel time). The preferences of the users are described by their utility functions. Beside the (potentially inconsistent) mean variance model used so far in transportation, we consider three other standard utility functions: the mean standard deviation model, and the CARA and CRRA utility functions. We show that maximization of expected utility provides a more general formulation than minimization of expected travel time (the latter case corresponds to the standard Wardrop principle). We illustrate the proposed approach with a simple network which consists in one origin/one destination and two routes in parallel. Total demand is inelastic. Capacity on one route is constant and on the other route it is stochastic, and depends on the states of nature, with two possible values. We assume that all users have the same value of time but that they differ in their risk aversion parameter. Equilibrium travel time then depends on the distribution of risk aversion. We consider two polar information regimes: no information and full information. We study the differential impacts of information according to the level of risk aversion, and compute the social value of information. We introduce a formula to compute the value of information that is the individual willingness to pay for information (or in economic terms, the compensating variation). Moreover, we find that optimal route choice may depend on global factors (and not only on local traffic conditions). This has serious implications on the design of driver information systems. Finally, we study road pricing when users are risk neutral (and minimize the expected travel time) and when users are risk adverse. We compare the level of tolls, as well as the benefits of road pricing with and without taking into account risk aversion. |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa05p423&r=upt |
| By: | James Poterba; Joshua Rauh; Steven Venti; David Wise |
| Abstract: | This paper examines how different asset allocation strategies over the course of a worker's career affect the distribution of retirement wealth and the expected utility of wealth at retirement. It considers both rules that allocate a constant portfolio fraction to various assets at all ages, as well as "lifecycle" rules that vary the mix of portfolio assets as the worker ages. The analysis simulates retirement wealth using asset returns that are drawn from the historical return distribution. The results suggest that the distribution of retirement wealth associated with typical lifecycle investment strategies is similar to that from age-invariant asset allocation strategies that set the equity share of the portfolio equal to the average equity share in the lifecycle strategies. There is substantial variation across workers with different characteristics in the expected utility from following different asset allocation strategies. The expected utility associated with different 401(k) asset allocation strategies, and the ranking of these strategies, is very sensitive to three parameters: the expected return on corporate stock, the worker's relative risk aversion, and the amount of non-401(k) wealth that the worker will have available at retirement. At modest levels of risk aversion, or in the presence of substantial non-401(k) wealth at retirement, the historical pattern of stock and bond returns implies that the expected utility of an all-stock investment allocation rule is greater than that from any of the more conservative strategies. Higher risk aversion or lower expected returns on stocks raise the expected utility of following lifecycle strategies or other strategies that reduce equity exposure throughout the lifetime. |
| JEL: | J14 J32 G11 G23 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11974&r=upt |
| By: | Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, Göteborg University) |
| Abstract: | Empirical evidence suggests that people’s risk-perceptions are often systematically biased. This paper develops a simple framework to analyse public policy when this is the case. Expected utility (well-being) is shown to depend on both objective and subjective risks. The latter are important because of the mental suffering associated with the risk and as a basis for corrective taxation and second-best adjustments. Optimality rules for public provision of riskreducing investments, “internality-correcting” taxation and provision of (costly) information to reduce people’s risk-perception bias are presented. <p> |
| Keywords: | Subjective risk; risk management; risk regulation; risk perception bias; terrorism; fat taxes; internalities; cost-benefit analysis; corrective taxation; paternalism |
| JEL: | D81 H40 |
| Date: | 2006–01–25 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0194&r=upt |
| By: | Michael Hurd (RAND and NBER); Susann Rohwedder (RAND) |
| Abstract: | According to economic theory, well-being or utility depends on consumption. However, at the household level, total consumption is rarely well measured because its collection requires a great deal of survey time. As a result income has been widely used to assess well-being and poverty rates. Yet, because households can use wealth to consume more than income, so an income-based measure of well-being could yield misleading results for many households. We use data from the Health and Retirement Study to find income-based poverty rates which we compare with poverty rates as measured in the Current Population Survey. We use HRS consumption data to calculate a consumption-based poverty rate and study the relationship between income-based and consumption-based poverty measures. We find that a poverty rate based on consumption is lower than an income-based poverty rate. Particularly noteworthy is the much lower rate among the oldest single persons such as widows. The explanation for the difference is the ability to consume out of wealth. |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:mrr:papers:wp110&r=upt |
| By: | Frank de Jong |
| Abstract: | This paper discusses the valuation of wage-indexed pension fund liabilities. Valuation by replication with market instruments is typically not possible as there are no wage-indexed assets. This paper discusses several methods to find a value in such incomplete markets and advocates utility-based valuation. This approach implies a simple adjustment on the discount factor that can be used to calculate the value of wage indexed liabilities. |
| Keywords: | incomplete markets; pension funds. |
| JEL: | G1 G23 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:067&r=upt |
| By: | Philip Bond; David K. Musto; Bilge Yilmaz |
| Abstract: | Regulators express growing concern over “predatory lending,” which the authors take to mean lending that reduces the expected utility of borrowers. The authors present a rational model of consumer credit in which such lending is possible, and identify the circumstances in which it arises with and without competition. Predatory lending is associated with imperfect competition, highly collateralized loans, and poorly informed borrowers. Under most circumstances competition among lenders eliminates predatory lending. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:06-02&r=upt |
| By: | Fabrizio Bulckaen and Marco Stampini |
| Abstract: | This paper deals with efficiency and distributional effects of marginal commodity tax reforms in economies with heterogeneous individuals. It contributes to the literature in three ways. First, a decision rule based on revenue potentialities – the ratio between marginal revenue and the tax base - is originally developed with reference to a many consumers economy. The relevance lies in the fact that these indicators do not depend on measures of utility. Second, the connection with former literature is analyzed. Third, a comprehensive and progressive decision-making procedure relying on revenue potentialities is defined. Overall, all that policy makers need to know – in order to look for improvements in efficiency and/or distribution through revenue-neutral marginal commodity tax reforms – is the revenue potentiality of each tax and the share of expenditure by poor families. An example with reference to Italian data is provided. |
| Keywords: | tax efficiency, commodity tax reform, public economics, revenue neutral, tax reform, commodity tax |
| Date: | 2006–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:nsw:discus:321&r=upt |
| By: | Edwin Van Gameren; Michiel Ras; Evelien Eggink; Ingrid Ooms |
| Abstract: | We investigate the effect of subsidies and levies on the behaviour of households on the Dutch housing market. Our primary interest lies in the effect on the tenure choice and on the levels of housing consumption for the whole population. The housing consumption level is not a priori defined. We chose a one-dimensional housing concept. Differences between market values may reflect differences in house characteristics, but may also stem from differences between markets. To find the ‘true’ levels of housing, we break up market values of houses into price and quantity, resulting in regional price indices for owner-occupied and rented houses separately. After correction for actual subsidies and levies (for the current tenure choice) and for imputed values (for the alternative choice), households face individually varying prices. We use a survey data set of about 60,000 Dutch households. Behaviour is estimated using a utility maximising consumption model with equations for both tenure choice and the consumption levels for owning respectively renting a house. The relation between choice and quantity is taken into account. The resulting price and income effects are in line with standard theory. Higher income gives a tendency towards owning rather than renting. |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa05p327&r=upt |
| By: | Dusica Joksimovic; Erik T. Verhoef; Michiel Bliemer |
| Abstract: | Using game theory we investigate a new approach to formulate and solve optimal tolls with a focus on different policy objectives of the road authority. The aim is to gain more insight into determining optimal tolls as well as into the behavior of users after tolls have been imposed on the network. The problem of determining optimal tolls is stated and defined using utility maximization theory, including elastic demand on the travelers’ side and different objectives for the road authority. Game theory notions are adopted regarding different games and players, rules and outcomes of the games played between travelers on the one hand and the road authority on the other. Different game concepts (Cournot, Stackelberg and monopoly game) are mathematically formulated and the relationship between players, their payoff functions and rules of the games are defined for very simplistic cases. The games are solved for different scenarios and different objectives for the road authority, using the Nash equilibrium concept. Using the Stackelberg game concept as being most realistic for road pricing, a few experiments are presented illustrating the optimal toll design problem subject to different pricing policies considering different objectives of the road authority. Results show different outcomes both in terms of optimal tolls as well as in payoffs for travelers. There exist multiple optimal solutions and objective function may have a non- continuous shape. The main contribution is the two-level separation between of the users from the road authority in terms of their objectives and influences. |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa05p430&r=upt |
| By: | Dick Ettema; Olu Ashiru; John Polak; Fabian Bastin |
| Abstract: | The recent growth of interest in activity-based methods has focused particular attention on travellers’ decision making regarding the timing and duration of their participation in activities. However, to date these two dimensions of activity participation have been largely treated separately. It is clear, however, that in general, the benefit that an individual derives from participating in an activity will depend inter alia both upon the time at which the activity is undertaken and the amount of time devoted to the activity. Moreover, it is also clear that this benefit will also depend on a wide range of other factors such as the quality of the activity opportunities available at particular destinations and the intensity with which activities are undertaken. Since these factors are inherently difficult or impossible to completely characterise or measure via conventional travel or time use data sources, it is likely that such decisions will also be characterised by significant unobserved heterogeneity. Based on earlier theoretical work by the authors, this paper proposes a model for the simultaneous choice of the timing and duration of activities and associated travel and uses data from a stated preference experiment to estimate the parameters of this model. The first section of the paper provides a brief review of the existing literature on activity timing and duration choice. The second section introduces the theoretical approach, which assume that the marginal utility derived from activities encompasses two distinct components; one derived from the duration of activity involvement and the other derived from activity participation at a particular time-of-day. A number of alternative additive and multiplicative specifications are introduced and their properties are explored. The third section briefly describes the stated preference data, which was collected in a survey undertaken in London in which respondents were presented with a number of scenarios in which they were asked to choose between alternative tours involving a single destination activity. The timing and duration both of the destination activity and the associated travel varied across scenarios. The fourth section discusses the empirical specification and estimation of the model and presents the estimation results. This uses an error-components formulation of the mixed multinomial logit model to account both for unobserved heterogeneity in tastes and for heteroskedascity and complex substitution patterns amongst activity alternatives. Particular attention is given to the use of advanced optimisation techniques needed to estimate the non-linear utility function expressing individuals’ timing and duration preferences.The fifth section discusses the significance of the results and their potential application to a number of practical transport planning problems including the prediction of user response to travel demand management policies and accessibility planning. The paper closes with some overall conclusions and a discussion of future research directions. |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa05p439&r=upt |
| By: | Vicente Royuela; Jordi Suriñach |
| Abstract: | Optimal City Size Theory has been superseded by new paradigms, such as the supply-oriented dynamic approach or the city network. Nevertheless, several aspects remain to be considered. First, the quality of life concept, which in many models enters into utility functions of households, can be addressed in a different way. Secondly, the bi-directional relationship between amenities and disamenities on the one hand and city size on the other needs to be considered. Both these points are empirically tested with instrumental variables in a local dynamic framework, the 314 municipalities belonging to the province of Barcelona (Spain), in the period 1991-2000. |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa05p519&r=upt |
| By: | Isabel Mota; António Brandão |
| Abstract: | In this essay, we intend to evaluate the importance of R&D (Research and Development) activities for firms' decision about location. For that purpose, we use micro-level data for the Portuguese industrial sector and focus on the location choices made by new starting firms during 1992-2000 within 275 municipalities. We consider two samples: the first one includes the entire manufacturer sector, while the second one restricts for those industrial branches that were R&D intensive. The set of explanatory variables includes a group of technological variables, such as R&D expenditures and human capital stock, as well as other explanatory variables that account for location specific characteristics and that are traditionally stressed by urban and regional theory, such as production costs (labor costs, land costs and taxes), demand indicators and agglomeration economies (urbanization and localization economies). The model is based on the random utility maximization framework but proceeds through a Poisson regression model for panel data, due to its equivalence with the conditional logit model. Through the estimation of the model, we were able to conclude that for the entire manufacturer sector, the main determinants for location decisions were the labor and land costs and the localization and urbanization economies. However, when considering the R&D intensive sample, those traditional location determinants lose importance, whilst the technological variables, such as the R&D expenditures, become relevant. |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa05p612&r=upt |
| By: | Christophe Muller (Universidad de Alicante) |
| Abstract: | The living standard indicator in utilitarian social evaluation functions (USEF) is the ratio of a nominal living standard and a price index. We show that under weak association of price indices and nominal living standards and usual concavity conditions on utility functions, utilitarian social welfare increases with price index dispersion when the aggregate price level is superior to the arithmetic mean of price indices, and diminishes when it is inferior to the harmonic mean. |
| Keywords: | Personal income distribution, economic welfare, price dispersion |
| JEL: | D31 D6 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2005-09&r=upt |
| By: | Dan Usher (Department of Economics, Queen\'s University) |
| Abstract: | An ideal planner would follow the original Samuelson rule: to undertake each and every public project, program or activity up to the point where the sum of its marginal benefits is just equal to its marginal cost. Actual governments modify the rule in response to the marginal cost of public funds and the shadow price of public expenditure. The first of these modifications is an additional cost of public revenue, over and above the tax people actually pay, when people rearrange their affairs to minimize their tax bills. The second is the effect - sometimes positive and sometimes negative - of the provision of the public project, program or activity on total tax revenue. Kaplow can be interpreted as arguing that these modifications cancel out, leaving the original Samuelson rule in tact. He turns out to be right for public provision of intermediate goods that augment output but do not themselves enter as arguments in the utility function. Otherwise he is mistaken. |
| Keywords: | Public Goodes, Deadweight Loss |
| JEL: | H21 H41 |
| Date: | 2004–06 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1020&r=upt |
| By: | Dan Usher (Department of Economics, Queen\'s University) |
| Abstract: | Patents raise the price and reduce consumption of the patented good, but the resulting deadweight loss is thought to be worth bearing when patent protection is required as an incentive to invention. The newly-invented good generates a residual surplus, making people better off than they would be if the good had not been invented. This well-known argument is usually framed in a context where people are identical, everybody's demand curve for the newly-invented good is the same and everybody shares to some extent in the residual surplus. However, when the newly-invented good is indivisible - like a heart transplant or the treatment of AIDS, where, in effect, a person consumes either one full unit of the good or none - the effect of a patent is to concentrate the entire benefit of the patented good upon the rich, leaving the poor no better off than if the good had not been invented. |
| Keywords: | Patents, Indivisible Goods |
| JEL: | D83 K11 O34 |
| Date: | 2004–04 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1018&r=upt |
| By: | Christophe Muller (Universidad de Alicante) |
| Abstract: | In general models, the strong quasi-concavity of the objective function, sufficient for theoretical properties of demands in consumer theory, is often arbitrary. Then, weaker global concavity conditions that preserve such properties are desirable for such models. We propose a new global concavity condition that implies, for models with several nonlinear constraints: the local uniqueness and the smoothness of the decision functions, and the negativity of the generalised substitution matrix. This condition can be used to specify more general and more flexible economic models. |
| Keywords: | Programming Models, Consumer Economics: Theory, Household Production |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2005-36&r=upt |