nep-upt New Economics Papers
on Utility Models and Prospect Theories
Issue of 2006‒10‒14
ten papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Scientific Revolution? A Farewell to EconWPA. MPRA is welcome. By Harin, Alexander
  2. Prospect Theory in Choice and Pricing Tasks By Lise Vesterlund; Bill Harbaugh; Kate Krause
  3. Multiagent negotiation for fair and unbiased resource allocation By Iyer, Karthik; Huhns, Michael
  4. Risk Aversion and Compliance in Markets for Pollution Control By John K. Stranlund
  5. On the Pricing and Hedging of Long Dated Zero Coupon Bonds By Eckhard Platen
  6. Banks, Relative Performance, and Sequential Contagion By Sudipto Bhattacharya; Charles A. E. Goodhart; Pojanart Sunirand; Dimitrios P. Tsomocos
  7. Can News About the Future Drive the Business Cycle? By Nir Jaimovich; Sergio Rebelo
  8. Transitional Dynamics in a Growth Model with Distributive Politics By Chetan Ghate
  9. Combining revealed and stated preference methods to assess the private value of agrobiodiversity in Hungarian home gardens: By Birol, Ekin; Kontoleon, Andreas; Smale, Melinda
  10. Frictional wage dispersion in search models: a quantitative assessment By Giovanni L. Violante; Per Krusell; Andreas Hornstein

  1. By: Harin, Alexander
    Abstract: A new approach is presented. It is based on a generalization of a breach of a term of contract and on the economic uncertainty principle. Problems, which can be solved, research fields, which can be augmented or created, and fields of applications in practical economy are reviewed. The role of information media is described.
    Keywords: uncertainty; risk; contract; utility; bank; market; industry; development; investment; scientific revolution; scientific evolution
    JEL: C7 D81 A1
    Date: 2006–10–03
  2. By: Lise Vesterlund; Bill Harbaugh; Kate Krause
    Date: 2005–01
  3. By: Iyer, Karthik; Huhns, Michael
    Abstract: This paper proposes a novel solution for the n agent cake cutting (resource allocation) problem. We propose a negotiation protocol for dividing a resource among n agents and then provide an algorithm for allotting portions of the resource. We prove that this protocol can enable distribution of the resource among n agents in a fair manner. The protocol enables agents to choose portions based on their internal utility function, which they do not have to reveal. In addition to being fair, the protocol has desirable features such as being unbiased and verifiable while allocating resources. In the case where the resource is two-dimensional (a circular cake) and uniform, it is shown that each agent can get close to l/n of the whole resource.
    Keywords: Utility theory ; Utility function ; Bargaining ; Artificial intelligence ; Resource allocation ; Multiagent system
    JEL: F51 J52 C78
    Date: 2005–10
  4. By: John K. Stranlund (Department of Resource Economics, University of Massachusetts Amherst)
    Abstract: This paper examines the effects of risk aversion on compliance choices in markets for pollution control. A firm’s decision to be compliant or not is independent of its manager’s risk preference. However, noncompliant firms with risk averse managers will have lower violations than otherwise identical firms with risk neutral managers. The violations of noncompliant firms with risk averse managers are independent of differences in their benefits from emissions and their initial allocations of permits if and only if their managers’ utility functions exhibit constant absolute risk aversion. However, firm-level characteristics do impact violation choices when managers have coefficients of absolute risk aversion that are increasing or decreasing in profit levels. Finally, in the equilibrium of a market for emissions rights with widespread noncompliance, risk aversion is associated with higher permit prices, better environmental quality, and lower aggregate violations.
    Keywords: Emissions Trading, Compliance, Enforcement, Risk Aversion
    JEL: L51 Q28
    Date: 2006–09
  5. By: Eckhard Platen (School of Finance and Economics, University of Technology, Sydney)
    Abstract: The pricing and hedging of long dated derivative contracts is a challenging area of research. As a result of utility indifference pricing for general payoffs the growth optimal portfolio turns out to be the appropriate numeraire or benchmark with the real world probability measure as corresponding pricing measure. This concept of real world pricing can be applied for valuing long dated derivatives. An equivalent risk neutral probability measure does not need to exist under this benchmark approach. This paper develops a parsimonious model for a stock index dynamics, which is based on a time transformed squared Bessel process. It uses a diversified world stock index as proxy for the growth optimal portfolio. Surprisingly low prices result for long dated zero coupon bonds that can be replicated using historical data. Such prices and hedges are difficult to explain under the prevailing risk neutral approach.
    Keywords: growth optimal portfolio; benckmark approach; real world pricing; expected utility maximization; utility indifference pricing; long dated zero coupon bonds; minimal market model
    JEL: G10 G13
    Date: 2006–09–01
  6. By: Sudipto Bhattacharya; Charles A. E. Goodhart; Pojanart Sunirand; Dimitrios P. Tsomocos
    Abstract: We develop a multi-period general equilibrium model of bank deposit, credit, and interim inter-bank loan markets in which banks initially specialize in their choices of debtors, leading to under-diversification, but nevertheless become entwined via inter-bank markets, leading to the fortunes of one bank affecting the profits and default rates of the other in a sequential manner. Lack of (full) diversification among credit risks arises in our model owing to a relative profit argument in each banker's utility function, which is otherwise risk- and default-averse. We examine its implications for the welfare of depositors and debtors.
    Date: 2006
  7. By: Nir Jaimovich; Sergio Rebelo
    Abstract: We propose a model that generates an economic expansion in response to good news about future total factor productivity (TFP) or investment-specific technical change. The model has three key elements: variable capital utilization, adjustment costs to investment, and preferences that exhibit a weak short-run wealth effect on the labor supply. These preferences nest the two classes of utility functions most widely used in the business cycle literature as special cases. Our model can generate recessions that resemble those of the post-war U.S. economy without relying on negative productivity shocks. The recessions are caused not by contemporaneous negative shocks but rather by lackluster news about future TFP or investment-specific technical change.
    JEL: E24 E32
    Date: 2006–09
  8. By: Chetan Ghate
    Abstract: This paper constructs a dynamic analysis of the growth and distribution models of Das and Ghate (2004) and Alesina and Rodrik (1994) when leisure is valued by agents. When leisure enters the utility function, we show that the tax rate on capital income chosen in a political equilibrium is lower than the growth maximizing tax rate. This slows growth down, but for a very different reason than in Alesina and Rodrik (1994). Here, unanimity holds, and slower growth comes together with valued leisure, while in AR, slower growth comes from conflicting choices over the tax rate, with a capital poor median voter prevailing. Our results generalize the work of Alesina and Rodrik (1994) and Das and Ghate (2004) in two ways. First, we assess the impact of redistributive politics on growth by looking at the effect of income inequality on the tax rate and labor supply. Second, using the set up of Das and Ghate (2004), we provide a dynamic analysis of Alesina and Rodrik (1994) where majority voting determines the extent of distribution, and thus, a relationship between inequality and growth. The general insight gained from the analysis is that characterizing the transitional dynamics in a model of redistributive politics and growth with endogenous leisure is not intractable.
    Keywords: Distributive Conflict, Endogenous Distribution, Median Voter Theorem, Endogenous Growth, Positive Political Economy
    JEL: E62 O40 P16
    Date: 2006–09
  9. By: Birol, Ekin; Kontoleon, Andreas; Smale, Melinda
    Abstract: " Hungarian home gardens are small-scale farms managed by farm households using traditional management practices and family labor. They generate private benefits for farmers by enhancing diet quality and providing food when costs of transacting in local markets are high. Home gardens also generate public benefits for society by supporting long-term productivity advances in agriculture. In this paper, we estimate the private value to farmers of agrobiodiversity in home gardens. Building on the approach presented in EPTD Discussion Paper 117 (2004), we combine a stated preference approach (a choice experiment model) and a revealed preference approach (a discrete-choice, farm household model). Both models are based on random utility theory. To combine the models, primary data were collected from the same 239 farm households in three regions of Hungary. Combining approaches leads to a more efficient and robust estimation of the private value of agrobiodiversity in home gardens. Findings can be used to identify those farming communities, which would benefit most from agri-environmental schemes that support agrobiodiversity maintenance, at least public cost." Authors' abstract
    Keywords: Home gardens, Small-scale farmers, Diet quality, Agricultural productivity, Agrobiodiversity, Household surveys, Private value, Choice experiment model, Farm household model, Revealed and stated preference methods,
    Date: 2006
  10. By: Giovanni L. Violante; Per Krusell; Andreas Hornstein
    Abstract: Standard search and matching models of equilibrium unemployment, once properly calibrated, can generate only a small amount of frictional wage dispersion, i.e., wage differerentials among ex-ante similar workers induced purely by search frictions. We derive this result for a specific measure of wage dispersion - the ratio between the average wage and the lowest (reservation) wage paid. We show that in a large class of search and matching models this statistic (the "mean-min ratio") can be obtained in closed form as a function of observable variables (i.e., interest rate, value of leisure, and statistics of labor market turnover). Looking at various independent data sources suggests that, empirically, residual wage dispersion (i.e., inequality among observationally similar workers) exceeds the model's prediction by a factor of 20. We discuss three extensions of the model (risk aversion, volatile wages during employment, and on-the-job search) and find that, in their simplest version, they can improve its performance, but only modestly. We conclude that either frictions account for a tiny fraction of residual wage dispersion, or the standard model needs to be augmented to confront the data.
    Date: 2006

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