nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2007‒07‒13
ten papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Risk attitude in real decision proBLEMs By Fabrizio Botti; Anna Conte; Daniela T. Di Cagno; Carlo D'Ippoliti
  2. On the impossibility of representing infinite utility streams By Juan A. Crespo; Carmelo Núñez; Juan Pablo Rincón-Zapatero
  4. Valuation of Self-Insurance and Self-Protection under Ambiguity: Experimental Evidence By Ozlem Ozdemir
  5. Owner Motivations in the UK Speciality Food Sector By Andrew Bugg
  6. Are equalization payments making Canadians better off ? A two-dimensional dominance answer By Benoît Tarroux
  7. Circumventing the problem of the scale: discrete choice models with multiplicative error terms By Fosgerau, Mogens; Bierlaire, Michel
  8. Why is Consumption More Log Normal Than Income? Gibrat's Law Revisited By Erich Battistin; Richard Blundell; Arthur Lewbel
  9. A Non-Bayesian Approach to (Un)Bounded Rationality By Werner Güth
  10. Towards a Theory of Deception By Philippe Jehiel; David Ettinger

  1. 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, Rank-Dependent Expected Utility and Regret-Rejoice. Our results show that individual-wise 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
  2. By: Juan A. Crespo; Carmelo Núñez; Juan Pablo Rincón-Zapatero
    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
  3. By: De Borger, Bruno; Fosgerau, Mogens
    Abstract: We formulate a model of reference-dependent preferences based on the marginal rate of substitution at the reference-point of a reference-free utility function. Using binary choices on the trade-off between money and travel time, reference-dependence 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 ‘reference-free’ 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 reference-dependence.
    Keywords: Reference-dependence; loss aversion; WTP-WTA gap; value of time
    JEL: C25 D01
    Date: 2007–01–05
  4. By: Ozlem Ozdemir (Yeditepe University)
    Abstract: This experimental study, first, compares the individual valuations of two risk reduction mechanisms: self-insurance and self-protection. 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: self-insurance, self-protection, risk, uncertainty
    JEL: C91 D81
    Date: 2007–07–06
  5. 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 owner-specific 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
  6. By: Benoît Tarroux
    Abstract: This paper provides a normative appraisal of the Canadian equalization transfers system. For that sake, the two-dimensional 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 well-being 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
  7. 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
  8. 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
  9. 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 state-specific goal formation. In a given choice task, the list of state-specific 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 state-specific 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
  10. By: Philippe Jehiel; David Ettinger
    Date: 2007

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