nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2011‒01‒16
five papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Production Under Uncertainty: A Simulation Study By Sriram Shankar; Chris O'Donnell; John Quiggin
  2. A Mispricing Model of Stocks Under Asymmetric Information By Winston Buckley; Garfield Brown; Mario Marshall
  3. Breakthrough innovations and welfare: The role of innovators' loss aversion and experience. By Daniela Grieco
  4. Identifying Strategies and Beliefs without Rationality Assumptions By Amos Golan; James Bono
  5. Uncertainty and technical efficiency in Finnish agriculture: a state-contingent approach By Celine Nauges; Chris O'Donnell; John Quiggin

  1. By: Sriram Shankar (School of Economics, University of Queensland); Chris O'Donnell (School of Economics, University of Queensland); John Quiggin (School of Economics, University of Queensland)
    Abstract: In this article we model production technology in a state-contingent framework. Our model analyzes production under uncertainty without being explicit about the nature of producer risk preferences. In our model producers’ risk preferences are captured by the risk-neutral probabilities they assign to the different states of nature. Using a state-general state-contingent specification of technology we show that rational producers who encounter the same stochastic technology can make significantly different production choices. Further, we develop an econometric methodology to estimate the risk-neutral probabilities and the parameters of stochastic technology when there are two states of nature and only one of which is observed. Finally, we simulate data based on our state-general state-contingent specification of technology. Biased estimates of the technology parameters are obtained when we apply conventional ordinary least squares (OLS) estimator on the simulated data.
    Keywords: CES, Cobb-Douglas, OLS, output-cubical, risk-neutral, state-allocable, state-contingent
    JEL: C15 C63 D21 D81 Q10
    Date: 2010–12
  2. By: Winston Buckley; Garfield Brown; Mario Marshall
    Abstract: We extend the theory of asymmetric information in mispricing models for stocks following geometric Brownian motion to constant relative risk averse investors. Mispricing follows a continuous mean--reverting Ornstein--Uhlenbeck process. Optimal portfolios and maximum expected log--linear utilities from terminal wealth for informed and uninformed investors are derived. We obtain analogous but more general results which nests those of Guasoni (2006) as a special case of the relative risk aversion approaching one.
    Date: 2011–01
  3. By: Daniela Grieco (Department of Economics (University of Verona))
    Abstract: Technological refinements appears to be much more frequent than breakthrough innovations. We argue that this could be the result of an optimizing choice when the innovation revenues are exposed to Knightian uncertainty and innovators are loss-averse. The innovator's choice between breakthrough and incremental innovations is analyzed in the context of a neo-Schumpeterian growth model that accounts for the introduction of new goods and related sunk costs. The results show that the welfare generated by breakthrough innovations drops dramatically when agents are uncertainty-averse and/or loss-averse, but rises as innovators' experience increases.
    Keywords: Incremental innovation, Breakthrough innovation, Uncertainty, Loss aversion, Experience
    JEL: D60 D81 O32
    Date: 2010–12
  4. By: Amos Golan; James Bono
    Abstract: In this paper we formulate a solution concept without making assumptions about expected utility maximization, common knowledge or beliefs. Beliefs, strate- gies and the degree to which players are expected utility maximizers are endoge- nously determined as part of the solution. To achieve this, rather than solving the game from the players' point of view, we analyze the game as an "observer" who is not engaged in the process of the game. Our approach is an information theoretic one in which the observer utilizes an observation of play and the Maximum Entropy principle. We compare our solution concept with Bayesian Nash equilibrium and over the entropy ratio test as a method for determining the appropriateness of common modeling assumptions. We also demonstrate that the QRE concept can be signicantly generalized when viewed from the observer's perspective. For games of incomplete information we discover that alternative uses of the observer's information lead to alternative interpretations of rationality. These alternative in- terpretations of rationality may prove useful, especially in the context of ex post arbitration, as they indicate who is motivating whom.
    Keywords: incomplete information, entropy, information theory, pairwise rationality, QRE, endogenous rationality JEL Codes: C70, C79
    Date: 2010–05
  5. By: Celine Nauges (School of Economics, University of Queensland); Chris O'Donnell (School of Economics, University of Queensland); John Quiggin (School of Economics, University of Queensland)
    Abstract: In this article, we present one of the first real-world empirical applications of state-contingent production theory. Our state-contingent behavioral model allows us to analyze production under both inefficiency and uncertainty without regard to the nature of producer risk preferences. Using farm data for Finland, we estimate a flexible production model that permits substitutability between state-contingent outputs. We test empirically, and reject, an assumption that has been implicit in almost all efficiency studies conducted in the last three decades, namely that the production technology is output-cubical, i.e., that outputs are not substitutable between states of nature.
    Keywords: state-contingent; production; uncertainty
    JEL: Q10 Q24 Q25
    Date: 2010–12

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