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on Utility Models and Prospect Theories |
| By: | John Creedy |
| Abstract: | This paper compares a uniform education voucher system with means-tested scheme in which the voucher is subject to a taper or withdrawal rate as parental gross income increases. Parents are assumed to maximise a utility function which includes their consumption, leisure and the human capital of children. The human capital production function has inputs consisting of parental human capital and expenditure on education. The government faces a budget constraint such that the voucher and a social dividend are financed from a proportional income tax. Alternative combinations of voucher and tax and transfer schemes are evaluated using a social welfare function defined in terms of the utility of parents. It is found that for all combinations of policy variables, a uniform voucher turns out to be optimal. However, if a binding constraint is placed on the maximum tax rate, means-testing, with a low taper, is found to be optimal. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:mlb:wpaper:978&r=upt |
| By: | Radosveta Ivanova-Stenzel (Humboldt-University of Berlin, Department of Economics, Spandauer Str. 1, D-10178 Berlin, Germany. ivanova@wiwi.hu-berlin.de); Timothy C. Salmon (Florida State University, Department of Economics, Tallahassee, FL, 32306-2180. Tel: 850-644-7207, Fax: 850-644-4535. tsalmon@garnet.acns.fsu.edu) |
| Abstract: | The conventional wisdom in the auction design literature is that first price sealed bid auctions tend to make more money while ascending auctions tend to be more efficient. We re-examine these issues in an environment in which bidders are allowed to endogenously choose in which auction format to participate. Our findings are that more bidders choose to enter the ascending auction than the first price sealed bid auction and this extra entry is enough to make up the revenue difference between the formats. Consequently, we find that both formats raise approximately the same amount of revenue. They also generate efficiency levels and bidder earnings that are roughly equivalent across mechanisms though the earnings in the ascending might be slightly higher. In expected utility terms though, we find that the expected utility of entering a first price sealed bid auction is greater than entering an ascending for any risk averse bidder suggesting that we are seeing “overentry” into the ascending auctions. |
| Keywords: | bidder preferences, private values, sealed bid auctions, ascending auctions, endogenous entry |
| JEL: | C91 D44 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:175&r=upt |
| By: | Radosveta Ivanova-Stenzel (Humboldt-University of Berlin, Department of Economics, Spandauer Str. 1, D-10178 Berlin, Germany. ivanova@wiwi.hu-berlin.de); Timothy C. Salmon (Florida State University, Department of Economics, Tallahassee, FL, 32306-2180. Tel: 850-644-7207, Fax: 850-644-4535. salmon@garnet.acns.fsu.edu) |
| Abstract: | Ivanova-Stenzel and Salmon (2004a) established some interesting yet puzzling results regarding bidders’ preferences between auction formats. The finding is that bidders strongly prefer the ascending to the first price sealed bid auction on a ceteris paribus basis but they are not willing to pay up to an entry price for entering into an ascending auction instead of a first price that would equalize the profits between the two. While it was found that risk aversion on the part of the bidders could resolve this anomaly the claim that risk aversion drives overbidding in first price auctions is somewhat controversial. In this study we examine two competing explanations for the observed behavior; loss aversion and “clock aversion”, i.e. a dislike for some aspect of the clock based bidding mechanism. We find that neither alternative explanation can account for bidders’ auction choice behavior leaving risk aversion as the only un-falsified hypothesis. |
| Keywords: | bidder preferences, private values, sealed bid auctions, ascending auctions |
| JEL: | C91 D44 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:174&r=upt |
| By: | Langlais, Eric |
| Abstract: | We show that whatever the representation of criminals' preferences under risk, the assumption according to which they are strongly risk averse individuals is not consistent with the available observations establishing that criminals are more sensitive to shifts in the probability of sanction than to changes in the level of the sanction. We suggest that: 1/ while a weakening of the risk aversion assumption may be useful, the risk seeking assumption may be better suited for criminals; 2/ the relevant assumption regarding criminals' risk attitude may depend on the policy instruments that models of crime deterrence take into account; 3/ additional experiments, including both monetary penalties and non monetary sanctions would be useful in order to learn more about their sensibility to probability, monetary and non monetary sanctions. |
| Keywords: | Risk aversion; monetary and non monetary sanctions; State Dependent preferences and RDEU models |
| JEL: | K42 K40 D81 K41 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:1149&r=upt |
| By: | Saito, Tetsuya |
| Abstract: | This paper provides a proof of Alchian and Allen’s thesis—superior good is relatively more consumed in distant market—with some restrictions on the utility function. Comparing to the proof by Borcherding and Silberberg (1978), those assumptions may restrict the model in some sense but we will find the Alchian-Allen theorem is independent of the third law of Hicks (Hicks 1946, pp. 309-311). The theorem is given by natural characteristics of relative demand curves. |
| Keywords: | Fixed transportation cost; quality of goods; relative demand; Alchian-Allen theorem |
| JEL: | D00 F19 |
| Date: | 2007–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:1297&r=upt |
| By: | Martin Dufwenberg (University of Arizona); Simon Gaechter (University of Nottingham); Heike Hennig-Schmidt (University of Bonn) |
| Abstract: | Psychological game theory can provide a rational choice explanation of framing effects; frames influence beliefs, and beliefs influence motivations. We explain this point theoretically, and explore its empirical relevance experimentally. In a 2×2-factorial framing design of one-shot public good experiments we show that frames affect subject’s first- and second-order beliefs, and contributions. From a psychological game-theoretic framework we derive two mutually compatible hypotheses about guilt aversion and reciprocity under which contributions are related to second- and first-order beliefs, respectively. Our results are consistent with either. |
| Keywords: | Framing; psychological games; guilt aversion; reciprocity; public good games; voluntary cooperation |
| JEL: | C91 C72 D64 Z13 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:cdx:dpaper:2006-20&r=upt |
| By: | Jenny Kragl; Julia Schmid |
| Abstract: | We study the effects of envy on the feasibility of relational contracts in a standard moral hazard setup with two agents. Performance is evaluated via an observable, but non-contractible signal which reflects the agent´s individual contribution to firm value. Both agents exhibit disadvantageous inequity aversion. In contrast to the literature, we find that inequity aversion may be beneficial: In the presence of envy, for a certain range of interest rates relational contracts may be more profitable. Furthermore, for some interest rates reputational equilibria exist only with inequity averse agents. |
| Keywords: | Principal-Agent, Relational Contract, Inequity Aversion, Envy |
| JEL: | D63 D82 M52 M54 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2006-085&r=upt |
| By: | Francisco J. Más (Universidad de Alicante); Juan Luis Nicolau (Universidad de Alicante) |
| Abstract: | In the advent of Customer Relationship Management, a more accurate profile of the consumer is needed. The objective of this paper is to show the usefulness of knowing consumer¿s complete utility function through his/her marginal utilities. This approach allows one to form groups of individuals with similar preferences (as traditional segmentation methods do) and to treat them individually (which represents an advance). The empirical application is carried out, on a sample of 2,127 individuals, in the context of tourism, where the customer relationship management philosophy is gaining more and more relevance. Con la llegada de la Gestión Relacional del Cliente, las organizaciones requieren un perfil del consumidor más preciso. En este contexto, el objetivo del presente trabajo consiste en proponer una segmentación apoyada en las utilidades marginales de las funciones de utilidad completas de cada individuo. Este enfoque permite formar grupos de individuos con preferencias similares (como los procedimientos habituales de segmentación) y también tratarlos de forma individual (lo que representa una novedad). La aplicación empírica se desarrolla en una muestra de 2.127 individuos en el contexto turístico, donde la filosifía de la gestión relacional del cliente está cobrando cada vez mayor importancia. |
| Keywords: | Gestión Relacional del Cliente, Utilidad Marginal Individual, Modelo Logit Mixto Customer Relationship Management, Marginal Individual Utility, Mixed Logit Model |
| JEL: | M41 G32 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasec:2006-16&r=upt |
| By: | Yuliya Demyanyk (Federal Reserve Bank of St. Louis); Vadym Volosovych (Department of Economics, College of Business, Florida Atlantic University) |
| Abstract: | We estimate potential welfare gains from financial integration and corresponding better insurance against country-specific shocks to output (risk sharing) for the twenty-five European Union countries. Using theoretical utility-based measures we express the gains from risk sharing as the utility equivalent of a permanent increase in consumption. We report positive potential welfare gains for all the EU countries if they move toward full risk sharing. Ten country-members who joined the Union in 2004 have more volatile or counter-cyclical consumption and output and would obtain much higher potential gains than the longer-standing fifteen members. |
| Keywords: | EU enlargement, financial integration, welfare gains, risk sharing |
| JEL: | F15 F36 E32 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:fal:wpaper:06009&r=upt |
| By: | Simtowe, Franklin |
| Abstract: | This study investigates the linkage between attitudes towards risk and adoption. We empirically examine the relative risk premium related to fertilizer-use among 404 farmers from Malawi and examine the relationship between risk aversion on fertilizer-use and the adoption of hybrid maize. Results show that Malawian farmers exhibit absolute Arrow-Pratt risk aversion towards the use of fertilizer. The findings also reveal that risk aversion towards the use of fertilizer is strongly associated with low intensity of hybrid maize adoption and that other than the safety net programs, human and financial capital variables such as age, household size, land size and off-farm income can be helpful in explaining the non-adoption puzzle. While safety net programs such as the free input distribution increase the likelihood of adoption, they are associated with low adoption intensity for hybrid maize. A key lesson is that when considering promoting a technology, it is important to assess the profit distribution associated with the use of complementary inputs and its implications for risk preference among technology users in order to avoid formulating misguiding policies. |
| Keywords: | Adoption; hybrid maize; fertilizer; risk-aversion; Malawi |
| JEL: | Q01 |
| Date: | 2006–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:1241&r=upt |
| By: | Fangcheng Tang (School of Economics and Management, Tsinghua University); Weizhou Zhong (School of Economics and Finance, Xi'an Jiaotong University); Shunfeng Song (Department of Economics, University of Nevada, Reno) |
| Abstract: | Underlying the fact that different tenderers have different preferences on risk-taking, this study investigates the different tenderers' behaviors in one-shot construction bid auctions. Our model extends the preconditions of previous assumption that all tenderers are characterized by neutral risk-taking in the original tendering model for lowest-price sealed tender. A general tendering model for the lowest-price sealed tender is established to explain the behavior of tenderers during the tendering. The results indicate that construction estimate is affected by the degree of uncertainties in the construction industry. Therefore, in a lowest-price sealed tender, risk-averse tenders would tender a higher price and conversely risk-seeking tenderers would tender a lower price when risk-neutral tenderers would tender a middle price. However, the risk-seeking tenderers are more likely to win the bid. |
| Keywords: | Auction, tender, uncertainty, preference, construction industry |
| JEL: | D44 L74 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:unr:wpaper:06-006&r=upt |
| By: | James Feigenbaum |
| Abstract: | Skinner’s (1988) second-order approximation to the consumption function under CRRA utility is generalized to accomodate any structure of uninsurable income risk. To second order` the expected rate of consumption growth depends on higher moments only through the currently perceived variance of the expected present value of future income. This approximation reveals that precautionary saving is a decreasing function of both the time preceding an income shock and the time remaining in the consumer’s lifespan after information shocks about this income shock. Since these effects oppose each other` the timing of shocks has an ambiguous effect on precautionary saving. In a finite-horizon model` precautionary saving produces a hump-shaped lifecycle profile of mean consumption primarily because the variance of future income decreases with age` but the lifecycle dynamics of total wealth also affect the shape of the profile. For a Markov income process with autocorrelations on the order of 0.9 or less` the second-order approximation performs surprisingly well for common parameter choices from the literature` but it does poorly as the autocorrelation approaches 1. |
| JEL: | E20 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:pit:wpaper:291&r=upt |
| By: | Cassie Mogilner; Tamar Rudnick; Sheena Iyengar (School of Business, Columbia University) |
| Abstract: | This investigation contrasts choosers who have one of two choice making goals—to either select an option matching previously established preferences or to construct a preference from among the options provided. Evidence from field and laboratory studies, in which choosers selected magazines, indicates that irrespective of the number of options provided, chooser satisfaction results from fulfilling one’s specific choice making goal. For Preference Matchers, satisfaction requires a choice set that includes their established favorite. For Preference Constructors, satisfaction requires perceptions of a variety of options to identify their optimal preference. Display cues (i.e., categories) serve to enhance these perceptions of choice. |
| Keywords: | Preference Matching, Preference Constructors, Display Cues |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:ads:wpaper:0070&r=upt |
| By: | Jacinto Braga (University of Nottingham); Steven Humphrey (University of Nottingham); Chris Starmer (University of Nottingham) |
| Abstract: | We report two experiments which investigate whether experience of decision-making in repeated markets purges behavior of preference reversals. We investigate two behavioral mechanisms that may be shaping bids in repeated auctions: a tendency to adjust bids towards previously observed market prices, and a tendency to reduce bids following bad market outcomes. We find little support for the former but strong support for the latter. Also, whilst 'just enough' market exposure eliminates the typical preference reversal phenomenon, continued exposure fosters the mirror image anomaly. Therefore, although market experience shapes behavior, it does not generally promote consistency with standard preference theory. |
| Keywords: | preference reversal, Vickrey auction, refining, loss experience, price following |
| JEL: | C91 D81 D83 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:cdx:dpaper:2006-19&r=upt |
| By: | Isabel Mota; Antonio Brandao |
| Abstract: | In this paper, we intend to evaluate the importance of geographical and technological variables for firms' decision about location. For that purpose, we make use of micro-level data for the Portuguese manufacturing sector and focus on the location choices made by new starting plants during 1992-2000 within 275 municipalities. Our main hypothesis is that location determinants affect unevenly single-plant and multi-plant firms. We then considered the entire manufacturing sector and also a partition according to the number of plants. The set of explanatory variables includes variables that are traditionally stressed by urban and regional theory, such as production costs (land, labour and capital costs), demand variables and agglomeration economies as well as technological variables, such as R&D expenditures The model is based on the random utility maximization framework and proceeds through a Poisson model and a Negative Binomial regression. When considering the total manufacturing sector, our results confirm the relevance of agglomeration economies (particularly, urbanization economies) and cost factors (labour and land costs) for firms' location choice. On the contrary, the hypothesis concerning the negative influence of capital costs on location choice is not confirmed in our study. Our research also evidences that the regional market is more significant for the location choice of new single plant firms, while the local market is more relevant for new multi-plant firms. Also, market accessibility is only relevant for the location choices made by new single-plant firms. We then concluded that new multi-plant firms are particularly sensitive to urbanization economies, land costs and local market, while new single-plant firms are more responsive to labour costs and agglomeration economies. |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa06p485&r=upt |