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on Utility Models and Prospect Theories |
| By: | Tania Burchardt |
| Abstract: | One of the motivations frequently cited by Sen and Nussbaum for moving away from a utility metric towards a capabilities framework is a concern about adaptive preferences or conditioned expectations. If utility is related to the satisfaction of aspirations or expectations, and if these are affected by the individual's previous experience of deprivation or wealth, then utility cannot provide a basis for assessing well-being, equality or social justice which is independent of the initial distribution. This paper contributes to the identification of adaptive expectations by using ten years of panel data from the British Household Panel Survey to study the process of adaptation based on the individual's own previous experience. Subjective assessments of financial well-being at time t, for individuals with a given income level, are compared according to the income trajectory of the individual over the previous one to nine years. Descriptive statistics are followed by multivariate analysis, introducing controls for changes in need (family size and composition, disability), and possible social reference groups (for example, ethnicity and employment status). Fixed effects regressions allow for individual variation in the scaling of satisfaction. The results show that year on year, individuals who have experienced a fall in income since the previous year are less satisfied than those who have a steady income, suggesting that subjective assessments may be made in comparison with previous experience. Surprisingly, individuals who have experienced an increase in income are also less satisfied. This suggests that income is a poor proxy for satisfaction but it does not provide firm evidence for the existence of adaptation over the short term. Over a longer period, those who have experienced falling incomes are less satisfied than those who have had constant income, while those who have experienced rising incomes are no more satisfied than those who have had constant incomes. This suggests that over a longer period, adaptation to changes in income is asymmetric: people adapt to rising incomes but less so falling incomes. The paper concludes that satisfaction with income is influenced by objective circumstances, and to changes in objective circumstances, in complex ways. In particular, the process of adaptation to rises in income masks long-term differences in outcomes for individuals and makes subjective assessments of well-being a flawed basis for judgements of inequality or social justice. An objective normative standard, such as is offered by the capabilities framework, avoids social evaluations being unduly influenced by individuals' past experiences. |
| Keywords: | Adaptation, subjective well-being, satisfaction, income, panel data |
| JEL: | D63 I31 B50 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cep:sticas:086&r=upt |
| By: | Orsolya Lelkes |
| Abstract: | This paper aims to test empirically if certain frequently used measures of well-being, which are regarded as valuable properties of human life, are actually desired by people. In other words, it investigates whether the "expert judgments" in social science overlap with social consensus on what the "good life" is. The starting hypothesis is that there is an overlap between these two in the case of basic needs. For the analysis, individuals' self-reported life satisfaction is used as a proxy for "utility", based on survey data, which includes about 30 000 individuals from 21 different European countries. The results indicate that the commonly used measures of well-being - labour market situation, health, housing conditions and social relations - significantly influence people's satisfaction, ceteris paribus. Next, the stability of preferences is tested using Hungarian data from the 1990s. The results indicate that there was only very limited change in the relationship between life satisfaction and basic measures of well-being despite the landslide of societal and economic transformation. |
| Keywords: | quality of life, capabilities, happiness, basic needs, economic transition |
| JEL: | D63 I31 P36 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cep:sticas:094&r=upt |
| By: | José M. Labeaga; Miguel Rodríguez; Xavier Labandeira |
| Abstract: | Most public policies have not only efficiency but also distributional effects. However, there is a kind of trade-off between modeling approaches suitable for calculating each one of these impacts on the economy. For the former, most of the studies have been conducted with general equilibrium models, whereas partial equilibrium models represent the main approach for distributional analysis. This paper proposes a methodology which enables us to carry out an analysis of the distributional and efficiency consequences of public policies. In order to do so, we have integrated a microeconomic household demand model and a computable general equilibrium model for the Spanish economy. We illustrate the advantages of this approach by simulating a revenue-neutral reform in Spanish indirect taxation, with a reduction of VAT and a simultaneous increase of energy taxes. The results show that the reform brings about significant efficiency and distributional effects, in some cases counterintuitive, and demonstrate the academic and social utility of this approximation. |
| URL: | http://d.repec.org/n?u=RePEc:fda:fdaddt:2006-02&r=upt |
| By: | Lindbeck, Assar (The Research Institute of Industrial Economics); Persson, Mats (Institute for International Economic Studies) |
| 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 (“mimicking”). 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: | 2006–01–25 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:0659&r=upt |
| By: | Patrick Bajari; Han Hong |
| Abstract: | Recently, empirical industrial organization economists have proposed estimators for dynamic games of incomplete information. In these models, agents choose from a finite number actions and maximize expected discounted utility in a Markov perfect equilibrium. Previous econometric methods estimate the probability distribution of agents’ actions in a first stage. In a second step, a finite vector of parameters of the period return function are estimated. In this paper, we develop semiparametric estimators for dynamic games allowing for continuous state variables and a nonparametric first stage. The estimates of the structural parameters are T1/2 consistent (where T is the sample size) and asymptotically normal even though the first stage is estimated nonparametrically. We also propose sufficient conditions for identification of the model. |
| JEL: | L0 L5 C1 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberte:0320&r=upt |
| By: | John F. Helliwell; Haifang Huang |
| Abstract: | In this paper we employ World Values Survey measures of life satisfaction as though they were direct measures of utility, and use them to evaluate alternative features and forms of government in large international samples. We find that life satisfaction is more closely linked to several World Bank measures of the quality of government than to real per capita incomes, in simple correlations and more fully specified models explaining international differences in life satisfaction. We test for differences in the relative importance of different aspects of good government, and find a hierarchy of preferences that depends on the level of development. The ability of governments to provide a trustworthy environment, and to deliver services honestly and efficiently, appears to be of paramount importance for countries with worse governance and lower incomes. The balance changes once acceptable levels of efficiency, trust and incomes are achieved, when more value is attached to building and maintaining the institutions of electoral democracy. |
| JEL: | H11 I31 P52 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11988&r=upt |
| By: | Jakub W. Jurek; Luis M. Viceira |
| Abstract: | We develop an analytical solution to the dynamic portfolio choice problem of an investor with power utility defined over wealth at a finite horizon who faces an investment opportunity set with time-varying risk premia, real interest rates and inflation. The variation in investment opportunities is captured by a flexible vector autoregressive parameterization, which readily accommodates a large number of assets and state variables. We find that the optimal dynamic portfolio strategy is an affine function of the vector of state variables describing investment opportunities, with coefficients that are a function of the investment horizon. We apply our method to the optimal portfolio choice problem of an investor who can choose between value and growth stock portfolios, and among these equity portfolios plus bills and bonds. For equity-only investors, the optimal mean allocation of short-horizon investors is heavily tilted away from growth stocks regardless of their risk aversion. However, the mean allocation to growth stocks increases dramatically with the investment horizon, implying that growth is less risky than value at long horizons for equity-only investors. By contrast, long-horizon conservative investors who have access to bills and bonds do not hold equities in their portfolio. These investors are concerned with interest rate risk, and empirically growth stocks are not particularly good hedges for bond returns. We also explore the welfare implications of adopting the optimal dynamic rebalancing strategy vis a vis other intuitive, but suboptimal, portfolio choice schemes and find significant welfare gains for all long-horizon investors. |
| JEL: | G12 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12017&r=upt |