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on Utility Models and Prospect Theory |
| By: | Pierre-André Chiappori; Monica Paiella (-) |
| Abstract: | Most classical tests of constant relative risk aversion (CRRA) based on individual portfolio composition use cross sectional data. Such tests must assume that the distributions of wealth and preferences are independent. We use panel data to analyze how individuals’ portfolio allocation between risky and riskless assets varies in response to changes in total financial wealth. We find the elasticity of the risky asset share to wealth to be small and statistically insignificant, supporting the CRRA assumption; this finding is robust when the sample is restricted to households experiencing ‘large’ income variations. Various extensions are discussed. |
| Keywords: | - |
| Date: | 2008–05–08 |
| URL: | http://d.repec.org/n?u=RePEc:prt:dpaper:5_2008&r=upt |
| By: | Ricardo Gonçalves (Faculdade de Economia e Gestão - Universidade Católica Portuguesa (Porto)) |
| Abstract: | This paper analyses a model of a common value English auction with discrete bidding. In this model, we show that there exists a communication equilibrium in which the high signal bidder strategically chooses his first bid so as to maximise his expected utility. Straightforward bidding, or increasing the bid by the minimum amount possible, is the equilibrium strategy for both bidders in all other auction rounds. We relate this result to recent research on English auctions with discrete bidding and auctions where bidders may have noisy information about their opponent's signals. |
| Keywords: | English Auctions, discrete bidding, communication equilibrium |
| JEL: | D44 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:cap:wpaper:042008&r=upt |
| By: | Alain Ayong Le Kama (EQUIPPE, Université de Lille I Faculté de sciences économiques et sociales, 59655 Villeneuve d'Ascq Cedex, France); Cuong Le Van (PSE, University Paris 1, CNRS CES, Paris, France); Katheline Schubert (PSE, University Paris 1, CNRS CES, Paris, France) |
| Abstract: | <p>There are two main approaches for defining social welfare relations for an economy with infinite horizon. The first one is to consider the set of intertemporal utility streams generated by a general set of bounded consumptions, and define a preference relation between them. This relation is ideally required to satisfy two main axioms, the Pareto axiom, which guarantees efficiency, and the Anonymity axiom, which guarantees equity. Basu and Mitra [2003] show that it is impossible to represent by a function a preference relation embodying both the efficiency and equity requirements and Basu and Mitra [2007] propose and characterize a new welfare criterion called utilitarian social welfare relation.</p><p>In the same framework, Chichilnisky [1996] proposes two axioms that capture the idea of sustainable growth: non-dictatorship of the present and non-dictatorship of the future, and exhibits a mixed criterion, adding a discounted utilitarian part (with possibly non constant discount rates), which gives a dictatorial role to the present, and a long term part, which gives a dictatorial role to the future. The drawback of Chichilnisky's approach is that it often does not allow to explicitly characterize optimal growth paths with optimal control techniques. Moreover, we observe that the optimal solution obtained with Chichilnisky's criterion, cannot in general be approximated by a sequence of optimal solutions with finite horizon.</p><p>Our aim is less general than Chichilnisky's, and Basu and Mitra's: we want to have a non-dictatorial criterion for optimal growth models. Instead of l<sub>+</sub><sup>∞</sup> as set of utilities, we just consider the set of utilities of consumptions which are generated by a specific technology. We show that the undiscounted utilitarian criterion pioneered by Ramsey [1928] is not only convenient if one wants to solve an optimal growth problem but also sustainable, efficient and equitable.</p> |
| Keywords: | Anonymity, intergenerational equity, natural resources, non-dictatorship of the future, non-dictatorship of the present, optimal growth models, Pareto, social welfare function, social welfare relation, sustainability, utilitarian undiscounted criterion |
| JEL: | D60 D70 D90 Q0 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:dpc:wpaper:1408&r=upt |
| By: | Paul Söderlind |
| Abstract: | A simple consumption-based two-period model is used to study the (theoretical) effects of disagreement on asset prices. Analytical and numerical results show that individual uncertainty has a much larger effect on risk premia than disagreement if (i) the risk aversion is reasonably high and (ii) individual uncertainty is not much smaller than disagreement. Evidence from survey data on beliefs about output growth suggests that the latter is more than satisfied. |
| Keywords: | riskfree rate, implied volatility, Survey of Professional Forecasters |
| JEL: | C42 G12 E44 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:usg:dp2008:2008-11&r=upt |
| By: | Vasco Gabriel (University of Surrey); Paul Levine (University of Surey); Christopher Spencer (University of Surrey); Bo Yang (University of Surrey) |
| Abstract: | The relevance of direct supply-side effects of monetary policy in a New Keynesian DSGE model is studied. We extend a model with several nominal and real frictions by introducing a cost channel of monetary transmission and allowing for non-separability of money and consumption in the utility of the representative household. These fea- tures have important theoretical consequences for the output-inflation trade-off and indeterminacy of interest rate rules. The empirical evidence for these effects are then examined using a Bayesian maximum likelihood framework complemented with GMM single-equation estimation. Both estimation strategies point to weak evidence for the cost channel and non-separable utility. |
| Keywords: | New Keynesian model, Bayesian maximum likelihood estimation, GMM, non-separable utility, cost channel. |
| JEL: | E42 E52 C11 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0408&r=upt |