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on Utility Models and Prospect Theory |
| By: | Rose-Anne Dana (CEREMADE); Cuong Le Van (Centre d'Economie de la Sorbonne - Paris School of Economics) |
| Abstract: | The theory of existence of equilibrium with short-selling is reconsidered under risk and ambiguity modelled by risk averse variational preferences. A sufficient condition for existence of efficient allocations is that the relative interiors of the risk adjusted sets of expectations overlap. This condition is necessary if agents are not risk neutral at extreme levels of wealths either positive or negative. It is equivalent to the condition that there does not exist mutually compatible trades, with non negative expected value with respect to any risk adjusted prior, strictly positive for some agent and some prior. It is shown that the more uncertainty averse and the more risk averse, the more likely are efficient allocations and equilibria to exist. |
| Keywords: | Uncertainty, risk, common prior, equilibria with short-selling, variational preferences. |
| JEL: | C62 D50 D81 D84 G1 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:b08039&r=upt |
| By: | LEROUX, Marie-Louise (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)); PONTHIERE, Grégory |
| Abstract: | This paper studies the normative problem of redistribution between agents who can influence their survival probability through private health spending, but who differ in their attitude towards the risks involved in the lotteries of life to be chosen. For that purpose, we develop a two-period model where agents's preferences on lotteries of life can be represented by a mean and variance utility function allowing, unlike the expected utility form, some – agent-specific – sensitivity to what Allais (1953) calls the 'dispersion of psychological values'. It is shown that if agents ignore the impact of their health expenditures on the return of their savings, the decentralization of the first-best optimum requires not only intergroup lump-sum transfers, but, also, group-specific taxes on health spending. Under asymmetric information, we find that a subsidy on savings is optimal, whereas group-specific taxes on health spending are of ambiguous signs. |
| Keywords: | longevity, risk, lotteries of life, expected utility theory, health spending. |
| JEL: | D81 H21 I12 I18 J18 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2008039&r=upt |
| By: | Blancard, S.; Boussemart, J.P.; Crainich, D.; Leleu, H. |
| Abstract: | We focus on a simple framework on wheat producer behaviour in a context of price output uncertainty. More precisely, we establish a relationship between ex post output price level and allocative inefficiency that allows to characterize farmers€٠risk preferences. Given this analysis, the connection between risk aversion and other socioeconomic variables (such as degree of output specialisation, total asset, debts, farmer€ٳ age€Ʃ can furthermore empirically be explored. This relationship is empirically tested on an unbalanced panel including about 650 wheat producers located in the French Department of Meuse over 1992- 2003. |
| Keywords: | Producer behaviour, allocative inefficiency, risk aversion, Crop Production/Industries, Risk and Uncertainty, |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ags:eaae08:44208&r=upt |
| By: | Yano, Y.; Blandford, D. |
| Abstract: | Several theoretical and empirical models have been developed to examine how risk aversion affects compliance with agri-environmental schemes under asymmetric information and uncertainty. However, none has examined the case where the level of compliance is a continuous variable and producers face simultaneous monitoring, output price and production uncertainty. Treating conservation effort as a continuous variable, we show that risk aversion can mitigate the moral hazard problem in most cases. However, if conservation effort has a risk-increasing impact on production the effect of risk aversion on compliance is ambiguous. |
| Keywords: | Agri-environmental schemes, uncertainty, moral hazard, Environmental Economics and Policy, |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ags:eaae08:44323&r=upt |
| By: | Jackwerth, Jens Carsten; Hodder, James E. |
| Abstract: | We model a firm’s value process controlled by a manager maximizing expected utility from restricted shares and employee stock options. The manager also dynamically controls allocation of his outside wealth. We explore interactions between those controls as he partially hedges his exposure to firm risk. Conditioning on his optimal behavior, control of firm risk increases the expected time to exercise for his employee stock options. It also reduces the percentage gap between his certainty equivalent and the firm’s fair value for his compensation, but that gap remains substantial. Managerial control also causes traded options to exhibit an implied volatility smile. |
| Keywords: | Risk; Wealth Management; Derivative |
| JEL: | G3 G32 |
| Date: | 2008–02–25 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:11643&r=upt |
| By: | Constantinides, George M.; Jackwerth, Jens Carsten; Czerwonko, Michal; Perrakis, Stylianos |
| Abstract: | American call and put options on the S&P 500 index futures that violate the stochastic dominance bounds of Constantinides and Perrakis (2007) over 1983-2006 are identified as potentially profitable investment opportunities. Call bid prices more frequently violate their upper bound than put bid prices do, while evidence of underpriced calls and puts over this period is scant. In out-of-sample tests, the inclusion of short positions in such overpriced calls, puts, and, particularly, straddles in the market portfolio is shown to increase the expected utility of any risk averse investor and also increase the Sharpe ratio, net of transaction costs and bid-ask spreads. The results are strongly supportive of mispricing. (JEL G11, G13, G14) |
| Keywords: | Risk Averse; Option; Index Futures |
| JEL: | G14 G11 G13 |
| Date: | 2008–03–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:11644&r=upt |
| By: | Sophie Massin (Centre d'Economie de la Sorbonne) |
| Abstract: | The aim of this article is to analyze the economic literature from the last thirty years in the field of addiction and to study its relation to the theory of rational choice (TRC). We show that the application of the TRC to addictive behaviors appeared in a context of reciprocity of stakes, i.e. the promotion of this theoretical framework and the explanation of this a priori irrational behavior. It allowed to emphasize the major influence of economic determinants such as prices, which were previously excluded from the analysis. Recent developments of the economic theory of addiction, via behavioral economics in particular, lead however to operate a distinction between revealed preferences and normative preferences and limit the use of the TRC in a normative perspective. |
| Keywords: | Addiction, rational choice, habit formation, intertemporal choices, revealed preferences. |
| JEL: | B41 D11 D91 I18 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:r08054&r=upt |