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on Utility Models and Prospect Theories |
| By: | Thomas Brodaty (THEMA, Université de Cergy-Pontoise); Robert Gary-Bobo (Université de Paris 1, IDEP and CEPR); Ana Prieto (THEMA, Université de Cergy-Pontoise) |
| Abstract: | We propose to model individual educational investments as a rational decision, maximizing expected utility, conditional on some characteristics observed by the student, under the combined risks affecting future wages and schooling duration. Assuming that students' attitudes toward risk can be represented by a CRRA utility, we show that the risk-aversion parameter can be identified in a natural way, using the variation in school-leaving ages, conditional on certified educational levels. Estimation can be performed by means of classic Maximum Likelihood methods. The model can easily be compared with a non-structural, simplified version, which is a standard wage equation with endogenous dummy variables representing education levels, education levels being themselves determined by an Ordered Probit model. We find small but significant values of the coefficient of relative risk aversion, between 0:1 and 0:9. These results are obtained with a rich sample of 12,500 young men who left the educational system in 1992, in France. |
| Date: | 2006–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2006-06&r=upt |
| By: | Yves Alarie; Georges Dionne |
| Abstract: | The aim of this paper is to propose a model of decision-making for lotteries. Lottery qualities are the key concepts of the theory. Qualities allow the derivation of optimal decision-making processes and are taken explicitly into account for lottery evaluation. Our contribution explains the major violations of the expected utility theory for decisions on two-point lotteries and shows the necessity of giving explicit consideration to lottery qualities. Judged certainty equivalent and choice certainty equivalent concepts are discussed in detail along with the comparison of lotteries. Examples are provided by using different test results in the literature. |
| Keywords: | Lottery choice, common ratio, preference reversal, pricing, lottery test, cognitive process, certainty equivalent |
| JEL: | D81 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:0617&r=upt |
| By: | John K. Dagsvik, Tom Kornstad and Terje Skjerpen (Statistics Norway) |
| Abstract: | In this paper we analyze labor force participation with particular reference to the discouraged worker effect. The theoretical point of departure is a simple model where the worker evaluates the expected utility of searching for work, and decides to participate in the labor market if the expected utility of the search exceeds the utility of not working. With suitable assumptions about unobserved and observed heterogeneity we derive an empirical model for the probability that the worker will be unemployed or employed as a function of the probability of getting a job, given that the worker searches for work. The model is estimated on Norwegian micro-data consisting of independent cross sections over 15 years. The results indicate that there is a substantial discouraged worker effect. |
| Keywords: | Discouraged workers; Labor force participation; Random utility modelling |
| JEL: | J21 J22 J64 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:ssb:dispap:453&r=upt |
| By: | Pierre-André Chiappori; Olivier Donni |
| Abstract: | Consider a model of bargaining, in which two players, 1 and 2, share a pie of size y. The bargaining environment is described by a set of parameters ? that may affect agents' preferences over the agreement sharing, the status quo outcome, or both. The outcomes (i.e., whether an agreement is reached, and if so the individual shares) and the environment (including the size of the pie) are known, but neither the agents' utilities nor their threat points. Assuming that the agents adopt a Nash bargaining solution, we investigate the empirical content of this assumption. We first show that in the most general framework, any outcome can be rationalized as a Nash solution. However, if (i) the size of the pie y does not influence the players' threat points and (ii) there exist (at least) two parameters ?1 and ?2 that are player-specific, in the sense that ?i does not influence the utility or the threat point of player j ? i, then Nash bargaining generates strong testable restrictions. Moreover, the underlying structure of the bargaining, i.e., the players' utility and threat point functions, can be recovered under slightly more demanding conditions. |
| Keywords: | Bargaining game, Nash solution, Testability, Identifiability, Cardinal utility |
| JEL: | C71 C78 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:0619&r=upt |
| By: | Pierre-André Chiappori (Department of Economics, University of Chicago); Olivier Donni (THEMA, Université de Cergy-Pontoise) |
| Abstract: | Consider a model of bargaining, in which two players, 1 and 2, share a pie of size $y$. The bargaining environment is described by a set of parameters $\lambda$ that may affect agents' preferences over the agreement sharing, the status quo outcome, or both. The outcomes (i.e., whether an agreement is reached, and if so the individual shares) and the environment (including the size of the pie) are known, but neither the agents' utilities nor their threat points. Assuming that the agents adopt a Nash bargaining solution, we investigate the empirical content of this assumption. We first show that in the most general framework, any outcome can be rationalized as a Nash solution. However, if (i) the size of the pie $y$ does not influence the players' threat points and (ii) there exist (at least) two parameters $\lambda_1$ and $\lambda_2$ that are player-specific, in the sense that $\lambda_i$ does not influence the utility or the threat point of player $j \neq i$, then Nash bargaining generates strong testable restrictions. Moreover, the underlying structure of the bargaining, i.e., the players? utility and threat point functions, can be recovered under slightly more demanding conditions. |
| Keywords: | Keywords: Bargaining Game, Nash Solution, Testability, Identifiability, Cardinal Utility |
| JEL: | C71 C72 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2006-07&r=upt |
| By: | Dagsvik, John K. (Research Department, Statistics Norway and the Ragnar Frisch Centre for) |
| Abstract: | This paper proposes a particular axiomatic approach to motivate the choice of functional forms and distribution of unobservables in continuous time models for discrete panel data analysis. We discuss in particular applications with data on transitions between employment and unemployment. This framework yields a characterization of transition probabilities and duration distributions in terms of structural parameters of the utility function and choice constraints. Moreover, it is discussed how the modeling framework can be extended to allow for involuntary transitions, structural state dependence and random effects. |
| Keywords: | Discrete choice in continuous time; Duration of unemployment/employment; Random utility models; Functional form; Invariance principles |
| JEL: | C23 C25 C41 |
| Date: | 2006–04–25 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:osloec:2006_006&r=upt |
| By: | Christian Belzil (CNRS-GATE, CIRANO and IZA Bonn); Marco Leonardi (University of Milan and IZA Bonn) |
| Abstract: | Using unique Italian panel data, in which individual differences in behavior toward risk are measured from answers to a lottery question, we investigate if (and to what extent) risk aversion can explain differences in schooling attainments. We formulate the schooling decision process as a reduced-form dynamic discrete choice. The model is estimated with a degree of flexibility virtually compatible with semi-parametric likelihood techniques. We analyze how grade transition from one level to the next varies with preference heterogeneity (risk aversion), parental human capital, socioeconomic variables and persistent unobserved (to the econometrician) heterogeneity. We present evidence that schooling continuation probabilities decrease with risk aversion at low grade levels, but increase with risk aversion at the time when the decision to enter higher education is made. However, differences in attitudes toward risk account for a modest portion of the probability of entering higher education. Differences in parental human capital and ability(ies) are much more important. |
| Keywords: | risk aversion, education, human capital, dynamic discrete choices |
| JEL: | J24 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2123&r=upt |
| By: | Ho, W-M, Zeng, J.; Jie Zhang (MRG - School of Economics, The University of Queensland) |
| Abstract: | This paper examines how inflation taxation a ects resource allocation and welfare in a neoclassical growth model with leisure, a production externality and money in the utility function. Switching from consumption taxation to inflation taxation to finance government spending reduces real money balances relative to income, but increases consumption, labor, capital and output. The net welfare effect of this switch depends crucially on the strength of the externality and on the elasticity of intertemporal substitution: While it is always negative without the externality, it is likely to be positive with a strong externality and elastic intertemporal substitution. |
| URL: | http://d.repec.org/n?u=RePEc:qld:uqmrg6:09&r=upt |
| By: | Casari, Marco |
| Abstract: | This study presents experimental data on pre-commitment and flexibility where monetary rewards are delivered with an actual delay. Preference for pre-commitment is defined as willingness to pay a cost to restrict the size of the choice set available in the future. Preference for flexibility is defined as willingness to pay a cost to enlarge the choice set available in the future. The existing empirical evidence about these phenomena is rather limited. On the other hand, models of intertemporal choice differ widely on these issues, with some predicting only demand for pre-commitment, others only demand for flexibility, while others neither one. We find that two-thirds of the subjects cannot be accounted for with the canonical exponential discounting model and that there is demand for both pre-commitment and flexibility. |
| Keywords: | experiments ; time preferences ; time inconsistency ; preference for commitment ; preference for flexibility ; discounting |
| JEL: | C91 D90 D81 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:pur:prukra:1183&r=upt |
| By: | Schmeling, Maik |
| Abstract: | Using a new data set on investor sentiment we show that institutional and individual sentiment proxy for smart money and noise trader risk, respectively. First, using bias-adjusted long-horizon regressions, we document that institutional sentiment forecasts stock market returns at intermediate horizons correctly, whereas individuals consistently get the direction wrong. Second, VEC models show that institutional sentiment forecasts mean-reversion whereas individuals forecast trend continuation. Finally, institutional investors take into account expected individual sentiment when forming their expectations in a way that higher (lower) expected sentiment of individuals lowers (increases) institutional return forecasts. Individuals neglect the information contained in institutional sentiment. |
| Keywords: | investor sentiment, predictive regressions, noise trader, smart money |
| JEL: | G11 G12 G14 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-337&r=upt |