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on Utility Models and Prospect Theory |
| By: | Anna Battauz; Marzia De Donno; Fulvio Ortu |
| Abstract: | We derive envelope theorems for optimization problems in which the value function takes values in a general Banach lattice, and not necessarily in the real line. We impose no restriction whatsoever on the choice set. Our result extend therefore the ones of Milgrom and Segal (2002). We apply our results to discuss the existence of a well-defined notion of marginal utility of wealth in optimal consumption-portfolio problems in which the utility from consumption is additive but possibly state-dependent and, most importantly, the information structure is not required to be Markovian. In this general setting, the value function is itself a random variable and, if integrable, takes values in a Banach lattice so that our general results can be applied. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:396&r=upt |
| By: | Nicolás de Roux; Marc Hofstetter |
| Abstract: | Over the last quarter of a century, inflation targeting has become a popular monetary regime. Nevertheless, empirical evaluations of IT have shown contradictory results. Part of the reason is that IT in and of itself constitutes an endogenous decision and thus needs to be properly instrumented. In this paper, we show that preferences over inflation constitute a crucial determinant of IT: countries exhibiting greater inflation aversion are more likely to adopt IT. |
| Date: | 2011–02–20 |
| URL: | http://d.repec.org/n?u=RePEc:col:000089:008731&r=upt |
| By: | Astrid Matthey (Max Planck Institute of Economics, Jena, Germany); Tobias Regner (Max Planck Institute of Economics, Jena, Germany) |
| Abstract: | Recent research has cast some doubt on the general validity of outcome-based models of social preferences. We develop a model based on cognitive dissonance that focuses on the importance of self-image. An experiment (a dictator game variant) tests the model. First, we find that subjects whose choices involve two psychologically inconsistent cognitions indeed report higher levels of experienced conflict and take more time for their decisions (our proxies for cognitive dissonance). Second, we find support for the main model components. An individual's self-image, the sensitivity to cognitive dissonance, and expected behavior of others have a positive effect on other-regarding behavior. |
| Keywords: | social preferences, other-regarding behavior, self-image, experiments,,cognitive dissonance, social norms, normative beliefs, expectations |
| JEL: | C72 C91 D80 |
| Date: | 2011–05–27 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2011-024&r=upt |
| By: | Kakarot-Handtke, Egmont |
| Abstract: | Between Keynes’s verbalized theory and its formal basis persists a lacuna. The conceptual groundwork is too small and not general. The quest for a comprehensive formal basis is guided by the question: what is the minimum set of foundational propositions for a consistent reconstruction of the money economy? We start with three structural axioms. The claim of generality entails that it should be possible to prove that Keynes’s formalism is a subset of the structural axiom set. The axioms are applied to a central part of the General Theory in order to achieve consistency and generality. |
| Keywords: | New framework of concept; Structure-centric; Axiom set; Full employment; Intermediate situation; Emergent money; Singularity; System immanent risk; Distributed profit; Saving; Investment; Allais-Identity |
| JEL: | E12 E25 E31 E24 E40 B41 |
| Date: | 2011–05–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:31179&r=upt |
| By: | Gianni Amisano (DG-Research, European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany and Department of Economics University of Brescia.); Oreste Tristani (DG-Research, European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.) |
| Abstract: | Phenomena such as the Great Moderation have increased the attention of macro-economists towards models where shock processes are not (log-)normal. This paper studies a class of discrete-time rational expectations models where the variance of exogenous innovations is subject to stochastic regime shifts. We first show that, up to a second-order approximation using perturbation methods, regime switching in the variances has an impact only on the intercept coefficients of the decision rules. We then demonstrate how to derive the exact model likelihood for the second-order approximation of the solution when there are as many shocks as observable variables. We illustrate the applicability of the proposed solution and estimation methods in the case of a small DSGE model. JEL Classification: E0, C63. |
| Keywords: | DSGE models, second-order approximation, regime switching, time-varying volatility. |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111341&r=upt |
| By: | Francesco Carravetta; Marco M. Sorge |
| Abstract: | This paper describes a method for solving a class of forward-looking Markov-switching Rational Expectations models under noisy measurement, by specifying the unobservable expectations component as a general-measurable function of the observable states of the system, to be determined optimally via stochastic control and filtering theory. Solution existence is proved by setting this function to the regime-dependent feedback control minimizing the mean-square deviation of the equilibrium path from the corresponding perfect-foresight autoregressive Markov jump state motion. As the exact expression of the conditional (rational) expectations term is derived both in finite and infinite horizon model formulations, no (asymptotic) stationarity assumptions are needed to solve forward the system, for only initial values knowledge is required. A simple sufficient condition for the mean-square stability of the obtained rational expectations equilibrium is also provided. |
| Keywords: | Rational Expectations, Markov-switching dynamic systems, Dynamic programming, Time-varying Kalman filter |
| JEL: | C5 C61 C62 C63 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse05_2011&r=upt |
| By: | Bernard Salanié (Columbia University - Department of Economics); Alfred Galichon (Ecole Polytechnique - Department of Economics) |
| Abstract: | We investigate a matching game with transferable utility when some of the characteristics of the players are unobservable to the analyst. We allow for a wide class of distributions of unobserved heterogeneity, subject only to a separability assumption that generalizes Choo and Siow (2006). We first show that the stable matching maximizes a social gain function that trades of two terms. The rst term is simply the average surplus due to the observable characteristics; and the second one can be interpreted as a generalized entropy function that reflects the impact of the unobserved characteristics. We use this result to derive simple closed-form formulæ that identify the joint surplus in every possible match and the equilibrium utilities of all participants, given any known distribution of unobserved heterogeneity. Moreover, we show that if transfers are observed, then the pre-transfer utilities of both partners are also identified. We conclude by discussing some empirical approaches suggested by these results for the study of marriage markets, hedonic prices, and the market for CEOs. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:clu:wpaper:1011-03&r=upt |