
on Utility Models and Prospect Theory 
By:  Fabrizio Botti (LUISS Guido Carli); Anna Conte (University of Rome II “Tor Vergata”, University of Rome I “La Sapienza”, and LUISS Guido Carli); Daniela T. Di Cagno (LUISS Guido Carli); Carlo D'Ippoliti (University of Rome I “La Sapienza”, and LUISS Guido Carli) 
Abstract:  Experimental economics focuses on eliciting preferences, studying individuals one at a time to take into account their heterogeneity. Experiments have the appealing property of collecting enough observations to perform such an analysis. In real word, and in natural experiments, individuals cannot be observed according to experimenters’ needs. We propose a method that aggregates over individuals taking into account their heterogeneity. Using data from a natural experiment, we estimate three models of decision making under risk: Expected Utility, RankDependent Expected Utility and RegretRejoice. Our results show that individualwise analyses can be substituted by pooled approaches without losing information about individual heterogeneity. 
Keywords:  Panel Data, Unobserved heterogeneity, Choice under risk 
JEL:  C15 C23 C25 D81 
URL:  http://d.repec.org/n?u=RePEc:lui:wpaper:144&r=upt 
By:  Juan A. Crespo; Carmelo Núñez; Juan Pablo RincónZapatero 
Abstract:  We show that, independently of the topology chosen on the set of all infinity utility streams, there is no Social Welfare Function preserving the von Weizsäcker’s overtaking criterion. With our proof we extend the impossibility result of Basu and Mitra. 
Date:  2007–06 
URL:  http://d.repec.org/n?u=RePEc:cte:werepe:we075530&r=upt 
By:  De Borger, Bruno; Fosgerau, Mogens 
Abstract:  We formulate a model of referencedependent preferences based on the marginal rate of substitution at the referencepoint of a referencefree utility function. Using binary choices on the tradeoff between money and travel time, referencedependence is captured by value functions that are centered at the reference. The model predicts a directly testable relationship among four commonly used valuation measures (willingness to pay (WTP), willingness to accept (WTA), equivalent gain (EG) and equivalent loss (EL)). Moreover, we show that the model allows recovering the underlying ‘referencefree’ value of time. This provides a potential solution to the issue of which measure to use for public policy evaluation. Based on a large survey data set, we estimate an econometric version of the model, allowing for both observed and unobserved heterogeneity. In a series of tests of high statistical power, we find that the relationship among the four valuation measures conforms to our model and that the constraints on the parameters implied by the model are met. The gap between WTP and WTA is found to be a factor of four. Loss aversion plays an important role in explaining responses; moreover, participants are more loss averse in the time dimension than the cost dimension. We further find evidence of asymmetrically diminishing sensitivity. Finally, we show that the fraction of ´mistakes`, in the sense that participants are observed to sometimes select dominated options, varies systematically in a way consistent with the model of referencedependence. 
Keywords:  Referencedependence; loss aversion; WTPWTA gap; value of time 
JEL:  C25 D01 
Date:  2007–01–05 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:3904&r=upt 
By:  Ozlem Ozdemir (Yeditepe University) 
Abstract:  This experimental study, first, compares the individual valuations of two risk reduction mechanisms: selfinsurance and selfprotection. Second, it investigates these valuations when the loss amount is ambiguous, and compare these values with valuations when loss amounts are known. results confirm that there exists no "framing effect" due to the two risk reduction mechanisms. Ambiguity in the loss amount has a weak impact on the valuation, and using different representations of ambiguity does not change the valuation. Moreover, the mean ratios of ambiguous to risky bids are greater than one for low loss amounts indicating ambiguity aversion. These ratios are not significantly different from one for high loss amounts regardless of the probability of loss levels. Finally, 28 percent of the sample behaved consistent with the predictions of "anchoring and adjustment", while only 6 percent supported the "maximin" predictions. 
Keywords:  selfinsurance, selfprotection, risk, uncertainty 
JEL:  C91 D81 
Date:  2007–07–06 
URL:  http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2007034&r=upt 
By:  Andrew Bugg 
Abstract:  This paper investigates empirically whether owner motivations are consistent with neoclassical models of profit maximisation. Contrary to the neoclassical model, in some markets owners gain private benefits from supplying products with certain characteristics. To consider this issue, a full theoretical model that allows owners to consider not only profit, but also utility, in their choices of price, product quality, and the use of an ownerspecific production method was developed. Information was gathered on owner motivations from the UK speciality food sector to test the propositions of the theoretical model. Evidence of systematic utility maximisation is found and utility maximising owners set higher profit maximising prices and produce a higher quality product. These findings have implications for the UK speciality food sector. 
Keywords:  Speciality food, objective function heterogeneity, factor analysis, seemingly unrelated regressions. 
JEL:  C1 C3 L1 L2 L7 Q1 
Date:  2007–03 
URL:  http://d.repec.org/n?u=RePEc:ccp:wpaper:wp0704&r=upt 
By:  Benoît Tarroux 
Abstract:  This paper provides a normative appraisal of the Canadian equalization transfers system. For that sake, the twodimensional dominance criteria introduced by Atkinson and Bourguignon (RES, 1982) are used to compare the distributions of private and public good before and after equalization payments. As the distribution before equalization is not observable, one simulates it on the basis of various scenarios which specify both its financing by the federal government and its utilization by provincial governments. The results show that Canadian equalization payments never improve social welfare for all utilitarian social planners who believe that household convert public and private goods into wellbeing by a utility function belonging to the classes that corresponds to the Atkinson and Bourguignon criteria. A further parametric restriction on the class of utility functions however enables to get more precise results. 
Keywords:  Equalization,Welfare Dominance, Multidimensional Distribution, Public Goods, Fiscal Federalism. 
Date:  2006–11 
URL:  http://d.repec.org/n?u=RePEc:iep:wpidep:0608&r=upt 
By:  Fosgerau, Mogens; Bierlaire, Michel 
Abstract:  We propose a multiplicative specification of a discrete choice model that renders choice probabilities independent of the scale of the utility. The scale can thus be random with unspecified distribution. The model mostly outperforms the classical additive formulation over a range of stated choice data sets. In some cases, the improvement in likelihood is greater than that obtained from adding observed and unobserved heterogeneity to the additive specification. The multiplicative specification makes it unnecessary to capture scale heterogeneity and, consequently, yields a significant potential for reducing model complexity in the presence of heteroscedasticity. Thus the proposed multiplicative formulation should be a useful supplement to the techniques available for the analysis of discrete choices. There is however a cost to be paid in terms of increased analytical complexity relative to the additive formulations. 
Keywords:  Multivariate extreme value; logsum 
JEL:  C25 
Date:  2007–07–03 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:3901&r=upt 
By:  Erich Battistin (University of Padova; Institute for Fiscal Studies); Richard Blundell (University College London; Institute for Fiscal Studies); Arthur Lewbel (Boston College) 
Abstract:  Significant departures from log normality are observed in income data, in violation of Gibrat's law. We identify a new empirical regularity, which is that the distribution of consumption expenditures across households is, within cohorts, closer to log normal than the distribution of income. We explain these empirical results by showing that the logic of Gibrat's law applies not to total income, but to permanent income and to maginal utility. These findings have important implications for welfare and inequality measurement, aggregation, and econometric model analysis. 
Keywords:  Consumption, Income, Lognormal, Inequality, Gibrat. 
JEL:  D3 D12 D91 
Date:  2007–07–06 
URL:  http://d.repec.org/n?u=RePEc:boc:bocoec:671&r=upt 
By:  Werner Güth (Max Planck Institute of Economics, Strategic Interaction Group) 
Abstract:  Can one define and test the hypothesis of (un)bounded rationality in stochastic choice tasks without endorsing Bayesianism? Similar to the state specificity of assets, we rely on statespecific goal formation. In a given choice task, the list of statespecific goal levels is optimal if one cannot increase the goal level for one state without having to decrease that for other states. We show that this allows to relate optimality more easily to bounded rationality where we interpret goal levels as aspirations. If for the latter there exist choices satisfying all statespecific aspirations and if one such choice is used, we speak of satisficing which may or may not be optimal. 
Keywords:  Satisficing, bounded rationality, optimality 
JEL:  B4 D81 D10 
Date:  2007–07–06 
URL:  http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2007035&r=upt 
By:  Philippe Jehiel; David Ettinger 
Date:  2007 
URL:  http://d.repec.org/n?u=RePEc:cla:levrem:843644000000000126&r=upt 