
on Utility Models and Prospect Theories 
By:  Matthias Paustian; Christian Stoltenberg 
Abstract:  This paper studies optimal monetary policy with the nominal interest rate as the single policy instrument in an economy, where firms set prices in a staggered way without indexation and real money balances contribute separately to households' utility. The optimal deterministic steady state under commitment is the Friedman rule  even if the importance assigned to the utility of money is small relative to consumption and leisure. We approximate the model around the optimal steady state as the longrun policy target. Optimal monetary policy is characterized by stabilization of the nominal interest rate instead of inflation stabilization as the predominant principle. 
Keywords:  Optimal monetary policy, commitment, timeless perspective, optimal steady state, staggered price setting, monetary friction, Friedman's rule 
JEL:  E32 E52 E58 
Date:  2006–10 
URL:  http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2006072&r=upt 
By:  Oliver Kirchkamp,; Philipp Reiß 
Abstract:  Firstprice auction experiments find often substantial overbidding which is typically related to risk aversion. We introduce a model where some bidders use constrained linear bids. As with risk aversion this leads to overbidding if valuations are high, but in contrast to risk aversion the model predicts underbidding if valuations are low. We test this model with the help of experiments, compare bidding in firstprice and secondprice auctions and study revenue under different treatments. We conclude that at least part of the commonly observed overbidding is an artefact of experimental setups which rule out underbidding. Constrained linear bids seem to fit observations better 
Keywords:  Auction, Experiment, Overbidding, Underbidding, RiskAversion 
JEL:  C92 D44 
Date:  2006–06 
URL:  http://d.repec.org/n?u=RePEc:san:crieff:0606&r=upt 
By:  Jörnsten, Kurt (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Ubøe, Jan (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration) 
Abstract:  In this paper we will study statistical equilibria in commodity markets where agents have a specified utility attached to every transaction in their offer sets. A probability measure on the product of all offer sets is called benefit efficient if market transactions with higher total benefit are more probable. We will characterize all such probability measures and show how this defines a new family of statistical equilibria in commodity markets. If agents are indifferent with respect to utility, these equilibria reduce to the classical entropy maximizing states. Moreover, we show how to construct what we call the most likely explanation for a set of observed commodity prices. 
Keywords:  Commodity markets; statistical equilibria; efficient probability measures 
JEL:  D40 D50 G10 
Date:  2005–05–26 
URL:  http://d.repec.org/n?u=RePEc:hhs:nhhfms:2005_002&r=upt 
By:  Romina Boarini (PREG  Pole de recherche en économie et gestion  [CNRS : UMR7176]  [Polytechnique  X]); JeanFrancois Laslier (PREG  Pole de recherche en économie et gestion  [CNRS : UMR7176]  [Polytechnique  X]); Stéphane Robin (GATE  Groupe d'analyse et de théorie économique  [CNRS : UMR5824]  [Université Lumière  Lyon II]  [Ecole Normale Supérieure Lettres et Sciences Humaines]) 
Abstract:  This paper presents the experimental results of a “Transcontinental Ultimatum Game” implemented between India and France. The bargaining took the form of standard ultimatum games, but in one treatment Indian subjects made offers to French subjects and, in another treatment, French subjects made offers to Indian subjects. We observed that French→Indian bargaining mostly ended up with unequal splits of money in favour of French, while nearly equal splits were the most frequent outcome in Indian→French interactions. The experimental results are organized through a standard social reference model, modified for taking into account the different marginal value of money for bargainers. In our model bargaining is driven by relative standings comparisons between players, occurring in terms of real earnings (that is monetary earnings corrected for a purchasing power factor) obtained in the game. The norm of equity behind the equalization of real earnings is called local equity norm, and contrasted to a global equity norm which would encompass the wealth of players beyond the game. According to what we observed, no beyondgame concern seems to be relevantly endorsed by subjects. 
Keywords:  Interpersonal Comparisons of Utility; Fairness; Bargaining experiment; Ultimatum Game 
Date:  2006–10–09 
URL:  http://d.repec.org/n?u=RePEc:hal:papers:halshs00104668_v1&r=upt 
By:  Ubøe, Jan (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Lillestøl, Jostein (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration) 
Abstract:  In this paper we consider statistical distributions of different types of patients on the patient lists of doctors. In our framework different types of patients have different preferences regarding their preferred choice of doctor. Assuming that the system is benefit efficient in the sense that distributions with larger total utility have higher probability, we can construct unique probability measures describing the statistical distribution of the different types of patients. 
Keywords:  Patient lists; efficient welfare; statistical distributions 
JEL:  I18 I30 
Date:  2006–04–27 
URL:  http://d.repec.org/n?u=RePEc:hhs:nhhfms:2006_003&r=upt 
By:  M. Menegatti 
Abstract:  This paper proposes a new interpretation for the precautionary saving motive: when future income is uncertain, agents increase saving in order to cause a reduction in the disutility due to uncertainty. Furthermore the paper shows that the usual necessary and sufficient condition for precautionary saving is the condition ensuring this effect to occur. 
Keywords:  Precautionary saving, Risk aversion, Prudence 
JEL:  D11 D81 E21 
Date:  2006 
URL:  http://d.repec.org/n?u=RePEc:par:dipeco:2006ep05&r=upt 
By:  Oliver Kirchkamp,; Philipp Reiß 
Abstract:  Bids in private value first price auctions consistently deviate from risk neutral symmetric equilibrium bids. It is difficult to explain this deviation with risk aversion. We propose and test two other explanations: (1) Bidders do not form correct expectations. (2) Bidders do not play a best reply against their expectations. We present a novel experimental setup which allows to observe bids and expectations separately. We extensively test the internal validity of this setup. We find that off equilibrium expectations explain, if at all, underbidding. Off equilibrium bids do not seem to be due to wrong expectations but due to deviations from a best reply 
Keywords:  Experiments, Auction, Expectations. 
JEL:  C92 D44 
Date:  2006–06 
URL:  http://d.repec.org/n?u=RePEc:san:crieff:0609&r=upt 
By:  Olivier Blanchard (MIT; NBER); Jordi Gali (Barcelona, Universitat Pompeu Fabra (UPF), Centre de Recerca en Economia Internacional (CREI); CEPR; NBER) 
Abstract:  We develop a utility based model of fluctuations, with nominal rigidities, and unemployment. In doing so, we combine two strands of research: the New Keynesian model with its focus on nominal rigidities, and the DiamondMortensenPissarides model, with its focus on labor market frictions and unemployment. In developing this model, we proceed in two steps. We first leave nominal rigidities aside. We show that, under a standard utility specification, productivity shocks have no effect on unemployment in the constrained efficient allocation. We then focus on the implications of alternative real wage setting mechanisms for fluctuations in unemployment. We then introduce nominal rigidities in the form of staggered price setting by firms. We derive the relation between inflation and unemployment and discuss how it is influenced by the presence of real wage rigidities. We show the nature of the tradeoff between inflation and unemployment stabilization, and we draw the implications for optimal monetary policy 
Keywords:  new Keynesian model, labor market frictions, search model, unemployment, sticky prices, real wage rigidities 
JEL:  E32 E50 
Date:  2006–10 
URL:  http://d.repec.org/n?u=RePEc:nbb:reswpp:2006104&r=upt 
By:  Aase, Knut K. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration) 
Abstract:  In this paper we make use of option pricing theory to infer about historical equity premiums. This we do by comparing the prices of an American perpetual put option computed using two different models: The first is the standard one with continuous, zero expectation, Gaussian noise, the second is a strikingly similar model, except that the zero expectation noise is of Poissonian type. The interesting fact that makes this comparison worthwhile, is that the probability distribution under the risk adjusted measure turns out to depend on the equity premium in the Poisson model, while this is not so for the standard, Brownian motion version. This difference is utilized to find the intertemporal, equilibrium equity premium. We apply this technique to the US equity data of the last century and find that, if the risk free short rate was around one per cent, this corresponds to a risk premium on equity about two and a half per cent. On the other hand, if the risk free rate was about four per cent, we find that this corresponds to an equity premium of around four and a half per cent. The advantage with our approach is that we only need equity data and option pricing theory, no consumption data was necessary to arrive at these conclusions. We round off the paper by investigating if the procedure also works for incomplete models. 
Keywords:  Historical equity premiums; perpetual American put option; equity premium puzzle; risk free rate puzzle; geometric Brownian motion; geometric Poisson process; CCAPM 
JEL:  G00 
Date:  2005–11–30 
URL:  http://d.repec.org/n?u=RePEc:hhs:nhhfms:2005_011&r=upt 
By:  Angelo Melino 
Abstract:  Lucas (2003) argues that the potential welfare gains from stabilizing the business cycle are small. In fact, he shows that the benefits of eliminating all economic fluctuations are small, both in an absolute sense and when compared to the potential gains from other reforms. His estimates are obtained using standard preferences. In this paper, I show that a model consistent with observed data on asset returns leads to very different conclusions. Calibrating preferences to observed asset market data raises the estimated welfare gains from completely eliminating aggregate fluctuations by approximately two orders of magnitude. Most of the gains, however, come from the elimination of low frequency contributions. 
Keywords:  welfare cost, fluctuations, stabilization 
JEL:  E32 E61 
Date:  2006–10–08 
URL:  http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa256&r=upt 