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on Utility Models and Prospect Theory |
| By: | Claudio Campanale (University of Alicante, Spain); Rui Castro (University of Montreal, Canada.); Gian Luca Clementi (New York University, USA and The Rimini Centre for Economic Analysis, Italy) |
| Abstract: | In this paper we provide a thorough characterization of the asset returns implied by a simple general equilibrium production economy with convex investment adjustment costs. When households have EpsteinÐZin preferences, there exist plausible parameter values such that the model generates unconditional mean riskÐfree rate and equity return, and volatility of consumption growth, which are in line with historical averages for the US economy. Consistently with the data, the priceÐdividend ratio is proÐcyclical and stock returns are predictable (and increasingly so as the time horizon increases), while dividend growth is not. The model also implies realistic values for (i) the correlation of the riskÐfree rate with output growth and consumption growth and (ii) the correlation pattern between riskÐfree rate, equity return, and equity premium. The risk implied by the model is rather low. Given the work of Rabin (2000) among others, it is not surprising that our EpsteinÐZin agent exhibits a much higher risk aversion when faced with substantially larger risks. This shortcoming, however, does not extend to the case in which agents are disappointment averse in the sense of Gul (1991). When faced with a lottery that has a coefficient of variation 100 times as large as that implied by our model, a disappointment averse agent displays the same relative risk aversion as an expected utility agent with logarithmic utility! |
| Keywords: | Equity Premium, Business Cycle, Predictability, Disappointment Aversion. |
| JEL: | D81 E32 E43 E44 G12 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:07-07&r=upt |
| By: | André de Palma (Member of the Institut Universitaire de France THEMA, Université de Cergy-Pontoise and ENPC, Paris); Karim Kilani (GREG, Conservatoire National des Arts et M´etiers 2 rue Cont´e, 75003, Paris, France) |
| Abstract: | We study the descriptive and the normative consequences of attribute changes in standard discrete choice models. For additive random utility models, we derive expressions for the transition choice probabilities for a change in the systematic utility. We then use these expressions to compute the CDF’s of the compensating variation conditional on the initial and on the final choices. The conditional moments of the compensating variation are obtained as a one-dimensional integral of the transition choice probabilities. We also provide a stochastic version of Shephard’s Lemma when transitions are observed. Example of the logit and the disaggregated CES are also studied. |
| Keywords: | Random Utility Models, Transition Choice Probabilities, Multinomial Logit Model, CES, Conditional Compensating Variation, Shephard’s Lemma. |
| JEL: | D11 D60 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2007-19&r=upt |
| By: | A. de Palma (ENPC and THEMA, Université de Cergy-Pontoise, 33 bd. du Port, F-95011 CERGY-PONTOISE, France); F. Marchal (Laboratory of Transportation Economics (LET), CNRS, Ave. Berthelot 14, F-69363 LYON, France) |
| Abstract: | Non-recurrent congestion in transportation networks occurs as a consequence of stochastic factors affecting demand and supply. Intelligent Transportation Systems such as Advanced Traveler Information Systems (ATIS) and Advanced Traffic Management Systems (ATMS) are designed in order to reduce the impacts of non-recurrent congestion by providing information to a fraction of users or by controlling the variability of traffic flows. For these reasons, the design of ATIS and ATMS requires reliable forecast of non-recurrent congestion. This paper proposes a new method to measure the impacts of non-recurrent congestion on travel costs by taking risk aversion into account. The traffic model is based on the dynamic traffic simulations model METROPOLIS. Incidents are generated randomly by reducing the capacity of the network. Users can instantaneously adapt to the unexpected travel conditions or can also change their behavior via a day-to-day adjustment process. Comparisons with incident-free simulations provide a benchmark for potential travel time savings that can be brought in by a state-of-the-art information system. We measure the impact of variable travel conditions by describing the willingness to pay to avoid risky or unreliable journeys. Indeed, for risk averse drivers, any uncertainty corresponds to a utility loss. This utility loss is computed for several levels of network disruption. The main results of the paper is that the utility loss due to uncertainty is of the same order of magnitude as the total travel costs. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2007-18&r=upt |
| By: | Yasuyuki Sawada (Faculty of Economics, University of Tokyo); Satoshi Shimizutani (Institute for International Policy Studies(IIPS)) |
| Abstract: | Using a unique household-level dataset on the situation after the Kobe earthquake in 1995, we test the full consumption risk sharing hypothesis, relaxing the separability assumption, and examine households' simultaneous choice of risk coping measures. Using multivariate probit estimations, we find that the full consumption insurance hypothesis is strongly rejected and our results indicate that households' utility across different expenditure items is not separable. As for households' choice of risk-coping measures, households borrowed extensively against housing damage, but relied on dissaving to cope with smaller asset damage, implying a hierarchy of risk-coping measures from dissaving to borrowing. |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2007cf512&r=upt |
| By: | André de Palma (THEMA, University of Cergy-Pontoise, and ENPC, France); Robin Lindsey (University of Alberta, Canada); Nathalie Picard (THEMA, University of Cergy-Pontoise, and INED, France) |
| Abstract: | Information about traffic conditions is conveyed to drivers by radio and variable message signs, and more recently available via the Internet and Advanced Traveler Information Systems (ATIS). This has spurred research on how travelers respond to information, how much they are likely to benefit from it and how much they are willing to pay for it. We analyze the decisions of drivers whether to acquire information and which route to take on a simple congested road network. Four information regimes are considered: No information, Free information which is publicly available at no cost, Costly information which is publicly available for a fee, and Private information which is available free to a single individual. We find that Private information is individually more valuable than either Free or Costly information, while the benefits from Free and Costly information cannot be ranked in general. We also find that Free or Costly information can decrease the expected utility of drivers who are sufficiently risk-averse. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2007-20&r=upt |