nep-upt New Economics Papers
on Utility Models and Prospect Theories
Issue of 2006‒09‒03
six papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Social security, income taxation and poverty distribution By MALDONADO, Darío
  2. Money Metrics Welfare Measures in Imperfect Markets under Growth By Li, Chuan Zhong; Löfgren, Karl-Gustaf
  3. The Incentive to Declare Taxes and Tax Revenue: The Lottery Receipt Experiment in China By Junmin Wan
  4. Irreversible Investment, Real Options, and Competition: Evidence from Real Estate Development By Laarni Bulan; Christopher J. Mayer; C. Tsuriel Somerville
  5. The Equity Premium Implied by Production By Urban Jermann
  6. Prospect Theory and the Law of Small Numbers in the Evaluation of Asset Prices By B. Luppi

  1. By: MALDONADO, Darío
    Abstract: In this paper I consider the normative arguments that justify a public social security system as a redistributive device when goverment is concerned with individual utility and poverty. Redistribution can be done using social security, income taxation or both. The main objective of this paper is to show how the consideration of a planner that cares about poverty and utility increases the desirability of social with respect to the case when the planner only cares about utility.
    Date: 2006–01–01
  2. By: Li, Chuan Zhong (Uppsala University, Box 513); Löfgren, Karl-Gustaf (Department of Economics, Umeå University)
    Abstract: This paper shows how utility based welfare measures in dynamic general equilibrium under imperfect markets can be transferred into a money metrics. In order to do this, we need to price forward looking components measured in units of utility. The typical comprehensive quasi-static welfare measure contains a core that looks like a comprehensive (green) NNP component, as well as additional consumer surplus terms for both consumption goods and the externality. In addition, it contains a forward looking component with the discounted value of the marginal externality as the function to be integrated over time is also required. To accomplish this, we need a price index that is independent of the market basket, or to assume that the marginal utility of income is constant over time. With respect to local welfare measures it turn out that growth in traditional NNP will surprisingly work, provided that we condition on a positive average marginal rate of return of investment, and use an augmented genuine saving concept.
    Keywords: Welfare measurement under growth; imperfect markets; utility versus money metrics
    JEL: D61 D91 Q01
    Date: 2006–08–28
  3. By: Junmin Wan (Osaka University)
    Abstract: We examine the validity of a new system of taxation called lottery receipts in China theoretically and empirically. Tax collection is difficult as the government difficultly monitors the actual economic dealings. To bring out the private information on transaction known only to a seller and a buyer, the government has set up a lottery receipt system which has been tried out in many areas. If the net revenue from a lottery receipt is invested in pure public goods, the lottery receipt will been purchased even if the consumer has expected quasi-linear utility. By issuing a lottery receipt, the government may prevent tax evasion caused by conspiracies between consumers and firms and collect tax effectively. Estimation is performed based on panel data for different periods from a total of 37 districts in Beijing and Tianjin during 1998-2003. The lottery receipt experiment has significantly raised the business tax, the growths of business tax and total tax revenues.
    Keywords: tax evasion, business tax, lottery receipt experiment, random trend (growth) model
    JEL: H26 D81 D82
    Date: 2006–09
  4. By: Laarni Bulan; Christopher J. Mayer; C. Tsuriel Somerville
    Abstract: We examine the extent to which uncertainty delays investment and the effect of competition on this relationship using a sample of 1,214 condominium developments in Vancouver, Canada built from 1979-1998. We find that increases in both idiosyncratic and systematic risk lead developers to delay new real estate investments. Empirically, a one-standard deviation increase in the return volatility reduces the probability of investment by 13 percent, equivalent to a 9 percent decline in real prices. Increases in the number of potential competitors located near a project negate the negative relationship between idiosyncratic risk and development. These results support models in which competition erodes option values and provide clear evidence for the real options framework over alternatives such as simple risk aversion.
    JEL: D4 D52 E23 R3
    Date: 2006–08
  5. By: Urban Jermann
    Abstract: This paper studies the determinants of the equity premium as implied by producers’ first-order conditions. A closed form expression is presented for the Sharpe ratio at steady-state as a function of investment volatility and adjustment cost curvature. Calibrated to the U.S. postwar economy, the model can generate a sizeable equity premium, with reasonable volatility for market returns and risk free rates. The market’s Sharpe ratio and the market price of risk are very volatile. Contrary to most models, the model generates a negative correlation between conditional means and standard deviations of aggregate excess returns.
    JEL: E23 G12
    Date: 2006–08
  6. By: B. Luppi
    Date: 2005

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