
on Utility Models and Prospect Theory 
By:  Jose María AbellánPerpiñán (Universidad de Murcia); Han Bleichrodt (Erasmus University Rotterdam); Jose Luis PintoPrades (Centro de Estudios Andaluces) 
Abstract:  This paper tests the consistency of health utility measurements with individual preferences. We compare three methods, the time tradeoff, the standard gamble and a version of the standard gamble that corrects for the deviations from expected utility modelled by prospect theory. Individual preferences are measured both through a ranking task and through a choice task. In decisions involving no risk the time tradeoff is most consistent with people’s preferences with the standard gamble a close second. In decisions involving risk the corrected standard gamble is most consistent with people’s preferences. Our data do not support the common assumption in health economics that utility is transferable across decision contexts. 
Keywords:  Health utility measurement, QALYs,stardard gamble, time tradeoff, prospect theory. 
JEL:  I10 
Date:  2007 
URL:  http://d.repec.org/n?u=RePEc:cea:doctra:e2007_14&r=upt 
By:  David Cass (Department of Economics, University of Pennsylvania) 
Abstract:  A major virtue of von NeumannMorgenstern utilities, for example, in the theory of general financial equilibrium (GFE), is that they ensure time consistency: consumptionportfolio plans (for the future) are in fact executed (in the future) — assuming that there is perfect foresight about relevant endogenous variables. This paper proposes an alternative to expected utility, one which also delivers consistency between plan and execution — and more. In particular, the formulation affords an extremely natural setting for introducing extrinsic uncertainty. The key idea is to divorce the concept of filtration (of the state space) from any considerations involving probability, and then concentrate attention on nested utilities of consumption looking forward from any dateevent: utility today depends only on consumption today and prospective utility of consumption tomorrow, utility tomorrow depends only on consumption tomorrow and prospective utility of consumption the day after tomorrow, and so on. 
Keywords:  Utility theory, Expected utility, Time consistency, Extrinsic uncertainty, CassShell Immunity Theorem 
JEL:  D61 D81 D91 
Date:  2007–12–15 
URL:  http://d.repec.org/n?u=RePEc:pen:papers:07036&r=upt 
By:  Markus Pannenberg 
Abstract:  This study examines the relationship between individual risk aversion and reservation wages using a novel set of direct measures of individual risk attitudes from the German SocioEconomic Panel (SOEP). We find that risk aversion has a significantly negative impact on the level of reservation wages. Moreover, we show that the elasticity of the reservation wage with respect to unemployment benefits is remarkably lower for riskaverse job seekers than for riskloving job seekers. The results are consistent with an interpretation that riskaverse job seekers set their reservation wage levels sufficiently low, so that they accept almost every job offer. 
Keywords:  Risk Aversion, Reservation Wages, Survey Data 
JEL:  J64 J65 
Date:  2007 
URL:  http://d.repec.org/n?u=RePEc:diw:diwsop:diw_sp23&r=upt 
By:  David Maddison; Katrin Rehdanz 
Abstract:  Hedonic theory assumes that changes in land prices and wage rates eliminate the utility advantages of differing locations. Using happiness data from the German socioeconomic panel this paper empirically tests whether regional utility differences exist and if so whether utility levels show any tendency to converge over time. Empirical analysis reveals substantial differences in utility over different regions of Germany. Analysing a panel of data indicates that even if individual utility levels are at any one moment in disequilibrium they are rapidly converging over Germany for all types of individuals. 
Keywords:  Educational expansion, correlated random coefficient model, heterogenous returns to education, conditional mean independence 
Date:  2007 
URL:  http://d.repec.org/n?u=RePEc:diw:diwsop:diw_sp16&r=upt 
By:  Richard Layard; Guy Mayraz; Stephen J. Nickell 
Abstract:  In normative public economics it is crucial to know how fast the marginal utility of income declines as income increases. One needs this parameter for costbenefit analysis, for optimal taxation and for the (Atkinson) measurement of inequality. We estimate this parameter using four crosssectional surveys of subjective wellbeing and two panel surveys. Altogether, we use data from over 50 countries, and in a period extending from 1972 to 2005. In all six surveys we find a consistent relationship between reported wellbeing and income. We estimate the elasticity of marginal utility with respect to income at around (minus) 1.26. In the second part of the paper we ask whether true utility may not have a convex relationship to reported happiness, making it less concave with respect to income. We find some evidence of this, so that the elasticity of marginal utility with respect to income may be somewhat lower at roughly (minus) 1.2. 
Keywords:  Marginal utility, income, life satisfaction, happiness, public economic, welfare, inequality, optimal taxation, referencedependent preferences 
JEL:  I31 H00 D1 D61 H21 
Date:  2007 
URL:  http://d.repec.org/n?u=RePEc:diw:diwsop:diw_sp50&r=upt 
By:  Neuman, Einat; Neuman, Shoshana 
Abstract:  A Discrete Choice Experiment (DCE) in the healthcare sector is used to test the loss aversion theory that is derived from referencedependent preferences: The absolute subjective value of a deviation from a reference point is generally greater when the deviation represents a loss than when the samesized change is perceived as a gain. As far as is known, this paper is the first to use a DCE to test the loss aversion theory. A DCE appears to be a highly suitable tool for this testing because it estimates the marginal valuations of attributes, based on deviations from a reference point (a constant scenario). Moreover, loss aversion can be examined for each attribute separately. A DCE can also be applied to nontraded goods with nontangible attributes. A healthcare event is used for empirical illustration: The loss aversion theory is tested within the context of preference structures for maternityward attributes, estimated using data entailing 3850 observations from a sample of 542 women who recently gave birth. Seven hypotheses are presented and tested. Overall, significant support for behavioural loss aversion theories was found. 
Keywords:  attributes; Discrete Choice Experiment; loss aversion; maternitywards; preferences; referencedependence 
JEL:  D01 D12 I19 
Date:  2007–12 
URL:  http://d.repec.org/n?u=RePEc:cpr:ceprdp:6616&r=upt 
By:  Marcello Basili; Carlo Zappia 
Abstract:  This note argues that a representation of the epistemic state of the individual through a nonadditive measure provides a novel account of Keynes’s view of probability theory proposed in his Treatise on Probability. The paper shows, first, that Keynes’s “nonnumerical probabilities” can be interpreted in terms of decisional weights and distorsions of the probability priors. Second, that the degree of nonadditivity of the probability measure can account for the confidence in the assessment without any reference to a second order probability. And, third, that the criterion for decision making under uncertainty derived in the nonadditive literature incorporates a measure of the degree of confidence in the probability assessment. The paper emphasises the Keynesian derivation of Ellsberg’s analysis: the parallel between Keynes and Ellsberg is deemed to be significant since Ellsberg’s insights represent the main starting point of the modern developments of decision theory under uncertainty and ambiguity. 
Keywords:  uncertainty, probabilities, Keynes. 
JEL:  B16 D21 
Date:  2007–06 
URL:  http://d.repec.org/n?u=RePEc:usi:depfid:003&r=upt 
By:  Kazuhiro Takino (Graduate School of Economics, Osaka University) 
Abstract:  In this article, we consider a derivative pricing model for the stochastic volatility model under an incomplete information. The incomplete information in our works, supposes that the true value of the drift for the stock price process is a random variable, investors only have an information of its distribution. This is more practical financial market than the situation with knowledge of the drift. There are many studies about the dynamic portfolio optimization problem under the incomplete information. In that situation, the corresponding problem becomes a easy to treat by Separating Principle and Bayesian updating formula. We apply these arguments to the utility indifference price approach, and present pricing method taken into account the incomplete information. On the other hand, Sircar and Zariphopoulou (2005) gives bounds and asymptotic approximations for the indifference prices in the stochastic volatility model. In them works, bounds include the drift parameter for the underlying price process. However, in practice, it is able to observe the drift parameter by estimation only. Therefore, it is meaningful to extended to the incomplete information. We derive bounds for the indifference prices using estimated drift, and the relationship between the buyerfs indifference price and the sellerfs one. 
Keywords:  Incomplete market, Incomplete information, Utility indifference price, Bayesian updating formula, Super/sub solution for PDEs. 
JEL:  G11 G13 G14 
Date:  2007–12 
URL:  http://d.repec.org/n?u=RePEc:osk:wpaper:0746&r=upt 
By:  Philip Sauré 
Abstract:  The workhorse model of the New Trade Theory fails to explain four strong and central patterns of postwar trade data. These patterns are, first, the massive increase in trade volumes, second, the small fraction of traded varieties the average country imports, third the correlation between per capita income growth and trade growth, and fourth, the correlation between trade growth and growth in the number of source countries per imported good. The present paper shows that a small and reasonable change in the demand structure can reconcile the model with the data. It departs from standard theory by assuming that consumers derive bounded marginal utility from varieties. This implies that consumers purchase only the cheaper share of varieties and that expensive foreign varieties bearing high transport costs are not imported. Technological progress which increases per capita consumption of the varieties in the consumption basket decreases marginal utility derived from each of them and induces consumers to extend their consumption to more expensive varieties produced at more distant locations. This additional margin along which trade can expand induces a substantial increase in the trade share as productivity grows. Productivity change is thus identified as a joint determinant of trade shares, the number of source countries per good, and per capita income, explaining the trends and correlations in the data. 
Keywords:  Trade Volume, Source Country 
JEL:  F1 F4 
Date:  2007 
URL:  http://d.repec.org/n?u=RePEc:eui:euiwps:eco2007/56&r=upt 
By:  Saito, Tetsuya 
Abstract:  This expository note shows Alchian and Allen’s conjecture–consumers purchase fine quality relatively more than coarse one– is true under some specific conditions about homogeneity, inner solution and substitutability while allowing the influence of the income effect. In the proof, to be an exposition, I emphasize graphical representations of AlchianAllen Theorem than algebra. 
Keywords:  Fixed transaction cost; quality of goods; AlchianAllen Theorem; change in consumption pattern 
JEL:  F10 D01 
Date:  2007–12–21 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:6442&r=upt 
By:  Joachim R. Frick; Olaf GrohSamberg 
Abstract:  Using representative micro data from the German SocioEconomic Panel Study (SOEP) for the year 2002, we analyse nontakeup behaviour of Social Assistance (SA) in Germany. According to our simulation as much as 67 percent of the eligible population did not claim SA in that year which is slightly higher than reported in previous work. We particularly emphasize the role of measurement error in estimating nontakeup. First, we consider misspecifications of the simulation model due, e.g., to households claiming to have received SA although not simulated as eligible (“betaerror”). Second, we employ sensitivity analyses revealing the impact of measurement errors in reported household income and wealth as well as in simulated needs. Misreported household incomes appear to have the greatest impact on the estimated nontakeup rates, as shown in MonteCarlotype simulations. Regression analysis of the potential determinants of nontakeup behaviour confirm that rational motives – i.e., the expected net utility from claiming – as well as stigma and other barriers play a crucial role in explaining the puzzle of large nontakeup rates of SA. 
Keywords:  NonTakeUp,Social assistance, measurement error, microsimulation, SOEP 
JEL:  I38 D61 C15 
Date:  2007 
URL:  http://d.repec.org/n?u=RePEc:diw:diwsop:diw_sp53&r=upt 