
on Utility Models and Prospect Theories 
By:  Thomas Crossley; Hamish Low (Institute for Fiscal Studies and Trinity College, Cambridge) 
Abstract:  This paper shows that a power utility specification of preferences over total expenditure (ie. CRRA preferences) implies that intratemporal demands are in the PIGL/PIGLOG class. This class generates (at most) rank two demand systems and we can test the validity of power utility on crosssection data. Further, if we maintain the assumption of power utility, and within period preferences are not homothetic, then the intertemporal preference parameter is identi…ed by the curvature of Engel curves. Under the power utility assumption, neither Euler equation estimation nor structural consumption function estimation is necessary to identify the power parameter. In our empirical work, we use demand data to estimate the power utility parameter and to test the assumption of the power utility representation. We find estimates of the power parameter larger than obtained from Euler equation estimation, but we reject the power specification of within period utility. 
Keywords:  Elasticity of intertemporal substitution, Euler equation estimation, demand systems 
JEL:  D91 E21 D12 
Date:  2005–11 
URL:  http://d.repec.org/n?u=RePEc:ifs:ifsewp:05/25&r=upt 
By:  Stefano Ficco (Erasmus Universiteit Rotterdam); Vladimir Karamychev (Erasmus Universiteit Rotterdam); Peran van Reeven (Erasmus Universiteit Rotterdam) 
Abstract:  This paper analyses the behavior of an individual who wants to maximize his utility function, but he is not able to evaluate it. There are many ways to choose a single alternative from a given set. We show that a unique utility maximizing procedure exists. Choices induced by this optimal procedure are always transitive but generally violate the Weak Axiom. In other words, utility maximizing individuals who are unable to evaluate their objective functions fail to exhibit rational revealed preferences. 
Keywords:  Bounded rationality; optimal selection procedure; procedural rationality 
JEL:  D81 
Date:  2006–01–06 
URL:  http://d.repec.org/n?u=RePEc:dgr:uvatin:20060001&r=upt 
By:  Alessandro Bucciol (University of Padua); Raffaele Miniaci (University of Brescia) 
Abstract:  We develop a model of optimal asset allocation based on a utility framework. This applies to a more general context than the classical meanvariance paradigm since it can also account for the presence of constraints in the portfolio composition. Using this approach, we study the distribution of a measure of wealth compensative variation, we propose a benchmark and portfolio efficiency test and a procedure to estimate the implicit risk aversion parameter of a power utility function. Our empirical analysis makes use of the S&P 500 and industry portfolios time series to show that although the market index cannot be considered an efficient investment in the meanvariance metric, the wealth loss associated with such an investment is statistically different from zero but rather small (lower than 0.5%). The wealth loss is at its minimum for a representative agent with a constant risk aversion index not higher than 5. Furthermore we show that, for reasonable levels of risk aversion, the use of an equally weighted portfolio is surprisingly consistent with an expected utility maximizing behavior. 
JEL:  C15 D14 G11 
Date:  2006–03 
URL:  http://d.repec.org/n?u=RePEc:pad:wpaper:0012&r=upt 
By:  Stijn Claessens (Universiteit van Amsterdam, and World Bank); Erik Feijen (Universiteit van Amsterdam) 
Abstract:  This paper analyses the behavior of an individual who wants to maximize his utility function, but he is not able to evaluate it. There are many ways to choose a single alternative from a given set. We show that a unique utility maximizing procedure exists. Choices induced by this optimal procedure are always transitive but generally violate the Weak Axiom. In other words, utility maximizing individuals who are unable to evaluate their objective functions fail to exhibit rational revealed preferences. 
Keywords:  Campaign contributions; Elections; Corruption; Preferential lending 
JEL:  D81 
Date:  2006–01–06 
URL:  http://d.repec.org/n?u=RePEc:dgr:uvatin:20060002&r=upt 
By:  Eric Danan 
Abstract:  It is shown that preferences can be constructed from observed choice behavior in a way that is robust to indifferent selection (i.e., the agent is indifferent between two alternatives but, nevertheless, is only observed selecting one of them). More precisely, a suggestion by Savage (1954) to reveal indifferent selection by considering small monetary perturbations of alternatives is formalized and generalized to a purely topological framework: references over an arbitrary topological space can be uniquely derived from observed behavior under the assumptions that they are continuous and nonsatiated and that a strictly preferred alternative is always chosen, and indifferent selection is then characterized by discontinuity in choice behavior. Two particular cases are then analyzed: monotonic preferences over a partially ordered set, and preferences representable by a continuous pseudoutility function. 
Keywords:  Revealed preference, indifference, choice behavior, continuity, nonsatiation, monotonicity, pseudoutility 
JEL:  D11 
Date:  2006–04 
URL:  http://d.repec.org/n?u=RePEc:upf:upfgen:952&r=upt 
By:  Paolo Panteghini 
Abstract:  This article studies the relationship between debt policies of multinational companies (MNCs) and governments' tax strategies. In the first part, it is shown that the ability to shift income from high to lowtax countries affects MNCs' financial choices. In the second part we show how MNCs' financial decisions can affect the tax strategies of two governments competing to attract income. Furthermore we show that, for reasonable levels of risk aversion, the use of an equally weighted portfolio is surprisingly consistent with an expected utility maximizing behavior. 
URL:  http://d.repec.org/n?u=RePEc:ubs:wpaper:ubs0606&r=upt 
By:  Francoise Forges; Enrico Minelli 
Abstract:  Afriat (1967) showed the equivalence of the strong axiom of revealed preference and the existence of a solution to a set of linear inequalities. From this solution he constructed a utility function rationalizing the choices of a competitive consumer. We extend Afriat’s theorem to a class of nonlinear budget sets. We thereby obtain testable implications of rational behavior for a wide class of economic environments, and a constructive method to derive individual preferences from observed choices. In an application to market games, we identify a set of observable restrictions characterizing Nash equilibrium outcomes. 
URL:  http://d.repec.org/n?u=RePEc:ubs:wpaper:ubs0609&r=upt 