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on Utility Models and Prospect Theories |
| By: | Dohmen, Thomas J; Falk, Armin; Huffman, David; Schupp, Jürgen; Sunde, Uwe; Wagner, Gert Georg |
| Abstract: | This paper presents new evidence on the distribution of risk attitudes in the population, using a novel set of survey questions and a representative sample of roughly 22,000 individuals living in Germany. Using a question that asks about willingness to take risks in general, on an 11-point scale, we find evidence of heterogeneity across individuals, and show that willingness to take risks is negatively related to age and being female, and positively related to height and parental education. We test the behavioral relevance of this survey measure by conducting a complementary field experiment, based on a representative sample of 450 subjects, and find that the general risk question is a good predictor of actual risk-taking behavior. We then use a more standard lottery question to measure risk preferences in our sample of 22,000, and find similar results regarding heterogeneity and determinants of risk preferences, compared to the general risk question. The lottery question also makes it possible to estimate the coefficient of relative risk aversion for each individual in the sample. Using five questions about willingness to take risks in specific domains - car driving, financial matters, sports and leisure, career, and health - the paper also studies the impact of context on risk attitudes, finding a strong but imperfect correlation across contexts. Using data on a collection of risky behaviors from different contexts, including traffic offences, portfolio choice, smoking, occupational choice, participation in sports, and migration, the paper compares the predictive power of all of the risk measures. Strikingly, the general risk question predicts all behaviors whereas the standard lottery measure does not. The best predictor for any specific behavior is typically the corresponding context-specific measure. |
| Keywords: | age; context; experimental validation; field experiment; gender differences; health; height; migration; occupational choice; risk preferences; SOEP; subjective well-being |
| JEL: | C91 C93 D0 D1 D80 D81 I1 J16 J24 J61 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5517&r=upt |
| By: | Thierry Post (Faculty of Economics, Erasmus Universiteit Rotterdam); Guido Baltussen (Faculty of Economics, Erasmus Universiteit Rotterdam); Martijn van den Assem (Faculty of Economics, Erasmus Universiteit Rotterdam) |
| Abstract: | The popular television game show 'Deal or No Deal' offers a unique opportunity for analyzing decision making under risk: it involves very large stakes, simple take-or-leave decisions that require minimal skill or strategy and near-certainty about the probability distribution. Based on a panel data set of the choices of contestants in all game rounds of 53 episodes from Australia and the Netherlands, we find an average Pratt-Arrow relative risk aversion (RRA) between roughly 1 and 2 for initial wealth levels between 0 and 50,000. The RRA differs substantially across the contestants and some even exhibit risk seeking behavior. The cross-sectional differences in RRA can be explained in large part by the previous outcomes experienced by the contestants during the game. Most notably, consistent with the 'break-even effect', the RRA strongly decreases following earlier losses and risk seeking arises after large losses. |
| Keywords: | Decision making under risk; Relative risk aversion; break-even effect; real incentives; game show |
| JEL: | D81 C23 C93 |
| Date: | 2006–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20060009&r=upt |
| By: | Ed Hopkins; Tatiana Kornienko |
| Abstract: | This paper considers the effects of changes in the income distribution in an economy where agents’ utility depends both on consumption and on their rank in the distribution of consumption of a positional good. We introduce a new methodology to compare the behavior of agents that occupy the same rank in the two different income distributions but typically have different levels of incomes, and analyze equilibrium choices and welfare of every member of the society for continuous distributions with arbitrary, even disjoint, ranges. If an income transformation raises incomes at the lower end of the income distribution, the poor will typically be better off. But because such an income transformation also increases the degree of social competition, the middle class will typically be worse off - even if they have higher incomes as well. An increase in incomes can make all better off, but only if it is accompanied by an increase in income dispersion. Our new techniques highlight the importance of density of social space as we demonstrate that one can have an increase both in income and relative position but still be worse off. |
| Keywords: | Status, relative standing, income inequality, conspicuous consumption, consumption externalities, income inequality, social competitiveness, first price auctions, dispersive orderings. |
| JEL: | C72 D11 D31 D62 |
| URL: | http://d.repec.org/n?u=RePEc:edn:esedps:139&r=upt |
| By: | Fabio Cerina (CRENoS and University of Cagliari) |
| Abstract: | This study focuses on the dynamic evolution of a small open economy specialized in tourism based on natural resources when tourist services are supplied to foreign tourists who are crowding-averse and give positive value to the environmental quality. We analyse the steady-state properties and run several policy exercises in two versions of our model: in the first, private agents’ income is spent entirely on consumption while, in the second, agents are allowed to invest part of their income in pollution abatement technology (PAT) which artificially increases the rate of regeneration of the environmental asset. A unique locally saddle point equilibrium is found in both versions and for both the market and the centralized solution. Our main findings are that: 1) a corrective income tax raises steady state utility in both versions but is capable of leading the economy in its first-best dynamic path only when agents cannot invest in the PAT; 2) when the PAT is available to the government but not to agents, an income tax which finances abatement expenditures may increase steady state utility with respect to the market solution when the natural regeneration rate of the environment and the degree of crowding-aversion are both low enough; 3) when PAT is available, the market chooses to devote a higher fraction of income to abatement than the central planner but in both cases this fraction is positive only if the natural rate of regeneration is not too large; 4) when PAT is available an income pollution tax does not affect the dynamic path of the market economy. |
| Keywords: | Tourism specialization, Sustainability, Environmental quality, Crowding, Pollution abatement |
| JEL: | L83 O41 Q26 Q56 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2006.11&r=upt |
| By: | Lindbeck, Assar (Institute for International Economic Studies, Stockholm University); Persson, Mats (Institute for International Economic Studies, Stockholm University) |
| Abstract: | A large literature on ex ante moral hazard in income insurance emphasizes that the individual can affect the probability of an income loss by choice of lifestyle and hence, the degree of risk-taking. The much smaller literature on moral hazard ex post mainly analyzes how a “moral hazard constraint†can make the individual abstain from fraud (“mimickingâ€). The present paper instead presents a model of moral hazard ex post without a moral hazard constraint; the individual's ability and willingness to work is represented by a continuous stochastic variable in the utility function, and the extent of moral hazard depends on the generosity of the insurance system. Our model is also well suited for analyzing social norms concerning work and benefit dependency. |
| Keywords: | Moral hazard; sick pay insurance; labor supply; asymmetric information |
| JEL: | G22 H53 I38 J21 |
| Date: | 2006–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iiessp:0742&r=upt |
| By: | Pascal Mossay (Universidad de Alicante) |
| Abstract: | We consider a continuous spatial economy consisting of pure exchange local economies. Agents are allowed to change their location over time as a response to spatial utility differentials. These spatial adjustments toward higher utility neighborhoods lead the spatial economy to converge to a spatially uniform allocation of resources, provided that the matrix of price effects is quasi-negative definite. Furthermore our model provides a real time interpretation of the tâtonnement story. Also, spatial fluctuations are shown to be damped at different rates according to their spatial scale. |
| Keywords: | local markets, migration, spatial economy, convergence, stability, tâtonnement, normal modes. |
| JEL: | D51 C60 R23 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2004-47&r=upt |
| By: | Yadira González de Lara (Universidad de Alicante) |
| Abstract: | This paper proposes a historically-grounded mechanism-design model of corporate finance, with two-side risk aversion under limited contract enforceability, where (inside) equity held by entrepreneurs, debt and (outside) equity coexist. This capital structure shares optimally the non-diversifiable risk associated with costly and risky ventures. Furthermore, it uniquely sustains the optimal risk allocation if agents' personal wealth is contractible at a higher enforcement cost than the projects' returns. Otherwise, the irrelevance theorem of Modigliani and Miller applies. Consistent with the theoretical predictions, we observe that (i) risk-averse merchants-entrepreneurs financed part of their ventures (hold inside equity) and raised additional funds from risk-averse investors through debt-like sea loan and equity-like commenda contracts when long-distance medieval trade was indeed highly costly and risky and that (ii) maritime insurance, with higher protection against the non-diversifiable "risk of loss at sea or from the action of men" but higher enforcement costs, did not develop until the mid-fourteenth century, when the ventures' costs and risk had decreased significantly. Whereas the model emphasizes the entrepreneurs' equity holdings and the limited-liability aspects of debt and equity, the choice between debt or equity derives from simple, although historically backed, information assumptions. The analysis is therefore complementary to other capital-structure theories based on agency costs, information asymmetries, signalling, transaction costs and incomplete contracting. |
| Keywords: | debt contracts, capital structure, creditworthiness, enforceability, inside and outside equity, insurance, limited liability, private information, risk-sharing |
| JEL: | D81 D82 G22 G32 N23 |
| Date: | 2004–04 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2004-16&r=upt |