nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2007‒09‒30
five papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Valuing a Risky Prospect Less than Its Worst Outcome: Uncertainty Effect or Task Ambiguity? By Andreas Ortmann; Sasha Prokosheva; Ondrej Rydval; Ralph Hertwig
  2. A Dynamic Mechanism and Surplus Extraction Under Ambiguity By Subir Bose; Arup Daripa
  3. Auctions with Anticipated Emotions: Overbidding, Underbidding, and Optimal Reserve Prices By Roider, Andreas; Schmitz, Patrick W.
  4. Pooling Risk Among Countries By Imbs, Jean; Mauro, Paolo
  5. Non-parametric counterfactual analysis in dynamic general equilibrium By Felix Kubler; Karl Schmedders

  1. By: Andreas Ortmann; Sasha Prokosheva; Ondrej Rydval; Ralph Hertwig
    Abstract: Gneezy, List and Wu [Q. J. Econ. 121 (2006) 1283-1309] document that lotteries are often valued less than the lotteries’ worst outcomes. We show how to undo this result.
    Keywords: Risky choice, framing, experiments, task ambiguity, subject confusion.
    JEL: C81 C91 C93 D83
    Date: 2007–07
  2. By: Subir Bose; Arup Daripa (School of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: In the standardindependentprivate values (IPV)model, each bidder’s beliefs about the values of any other bidder is represented by a unique prior. In this paper we relax this assumption and studythe question of auction design in an IPV setting characterizedby ambiguity: bidders have an imprecise knowledge of the distribution of values of others, and are faced with a set of priors. We also assume that their preferences exhibit ambiguity aversion. We show that a simple variation of a discrete Dutch auction can extract almost all surplus. This contrasts with optimal auctions under IPV without ambiguity as well as with optimal static auctions with ambiguity-in allofthese, types other than the lowestparticipatingtype obtain a positive surplus. And,unlike the well-known Cremer-McLean mechanism, our modifiedDutch mechanism satisfies limited liability. An important point of departure is that the modified Dutch mechanism we consider is dynamic rather than static, establishing that under ambiguity aversion–even when the settingis IPV in all other respects–a dynamic mechanism could have additional bite over its static counterparts.
    Keywords: Ambiguity Aversion, Modified Dutch Auction, Surplus Extraction
    JEL: D44
    Date: 2007–09
  3. By: Roider, Andreas; Schmitz, Patrick W.
    Abstract: The experimental literature has documented that there is overbidding in second-price auctions, regardless of bidders' valuations. In contrast, in first-price auctions there tends to be overbidding for large valuations, but underbidding for small valuations. We show that the experimental evidence can be explained by a simple extension of the standard auction model, where bidders anticipate positive or negative emotions caused by the mere fact of winning or losing. Even if the "emotional" (dis-)utility is very small, the seller's optimal reserve price r* may be significantly different from the standard model. Moreover, r* is decreasing in the number of bidders.
    Keywords: auction theory; emotions; reserve prices
    JEL: D44 D81 D82
    Date: 2007–09
  4. By: Imbs, Jean; Mauro, Paolo
    Abstract: We identify the groups of countries where international risk-sharing opportunities are most attractive. We show that the bulk of risk-sharing gains can be achieved in groups consisting of as few as seven members, and that further marginal benefits quickly become negligible. For many such small groups, the welfare gains associated with risk sharing are far larger than Lucas¡¦s classic calibration suggested for the United States, under similar assumptions on utility. Why do we not observe more arrangements of this type? Our results suggest that large welfare gains can only be achieved within groups where contracts are relatively difficult to enforce. International diversification can thus yield substantial gains, but they may remain untapped owing to potential partners¡¦weak institutional quality and a history of default on international obligations. Noting that existing risk-sharing arrangements often have a regional dimension, we speculate that shared economic interests such as common trade may help sustain such arrangements, though risk-sharing gains are smaller when membership is constrained on a regional basis.
    Keywords: diversification; enforceability; risk sharing
    JEL: E21 E32 F41
    Date: 2007–09
  5. By: Felix Kubler (Department of Economics, University of Pennsylvania); Karl Schmedders (Kellogg MEDS, Northwestern University)
    Abstract: In this paper we examine non-parametric restrictions on counterfactual analysis in a simple dynamic stochastic general equilibrium model. Under the assumption of time-separable expected utility and complete markets all equilibria in this model are stationary, the Arrow-Debreu prices uniquely reveal the probabilities and discount factor and the equilibrium correspondence defined as the map from endowments to stationary (probability-free) state prices, is identical to the equilibrium correspondence in a standard Arrow-Debreu exchange economy with additively separable utility. We examine observable restriction on this correspondence and give necessary as well as sufficient conditions on profiles of individual endowments that ensure that associated equilibrium prices cannot be arbitrary. While often there are restrictions on possible price changes we also show that in most cases results from a single agent economy do not carry over to a setting with heterogeneous agents.
    Keywords: Dynamic general equilibrium, non-parametric analysis, observable restrictions
    JEL: D50 G10
    Date: 2007–09–17

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