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on Utility Models and Prospect Theory |
| By: | Antoine Bommier (ETH Zurich, Switzerland); François Le Grand (EMLyon Business School, France and ETH Zurich, Switzerland) |
| Abstract: | This paper suggests a new explanation for the low level of annuitization, which is valid even if one assumes perfect markets. We show that, as soon there exists a positive bequest motive, sufficiently risk averse individuals should not purchase annuities. A model calibration accounting for temporal risk aversion generates a willingness-to-pay for annuities, which is significantly smaller than the one generated by a standard Yaari (1965) model. Moreover, the calibration predicts that riskless savings finances one third of consumption, in line with empirical findings. |
| Keywords: | annuity puzzle, insurance demand, bequest, intergenerational transfers, temporal risk aversion, multiplicative preferences |
| JEL: | D11 D81 D91 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:eth:wpswif:12-157&r=upt |
| By: | Pamela Giustinelli (University of Michigan) |
| Abstract: | Predicting group decisions with uncertain outcomes involves the empirically difficult task of disentangling individual decision makers' beliefs and preferences over outcomes' states from the group's decision rule. This paper addresses the problem within the context of a consequential family decision concerning the high school track of adolescent children in presence of curricular strati cation. The paper combines novel data on children's and parents' probabilistic beliefs, their stated choice preferences, and families' decision rules with standard data on actual choices to estimate a simple model of curriculum choice featuring both uncertainty and heterogeneous cooperative-type decisions. The model's estimates are used to quantify the impact on curriculum enrollment of policies affecting family members' expectations via awareness campaigns, publication of education statistics, and changes in curricular specialization and standards. The latter exercise reveals that identity of policy recipients--whether children, parents, or both--matters for enrollment response, and underlines the importance of incorporating information on decision makers' beliefs and decision rules when evaluating policies. |
| Keywords: | Choice under Uncertainty, Multilateral Choice, Heterogeneous Decision Rules, Curricular Tracking, Curriculum Choice, Child-Parent Decision Making, Subjective Probabilities, Stated and Revealed Preferences, Choice-Based Sampling |
| JEL: | C25 C35 C50 C71 C81 C83 D19 D81 D84 I29 J24 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:hka:wpaper:2011-030&r=upt |
| By: | YiLi Chien; Kanda Naknoi |
| Abstract: | Our paper investigates whether the valuation effect caused by a large risk premium and a low risk-free rate can help to explain the enormous US current account and trade deficit observed in the past decade. To answer this question, we set up an endowment growth model in which investors are endowed with heterogeneous trading technologies. In our model, the average US investors load up more aggregate risk by investing in a risky asset abroad and issuing a risk-free asset. Thanks to the large risk premium as well as the low risk-free rate, the US can sustain a long-run trade deficit even as a debtor country. Quantitatively, we find that the valuation effect caused solely by the high risk premium and the low risk-free rate in our model, which is calibrated to match the external assets and liabilities of US economy, can account for more than half of the observed trade deficit and current account deficit. Our results suggest that the current US trade deficit might not necessarily lead to net export increases or dollar depreciation in the future. |
| Keywords: | Global Imbalances; External Account; Risk Premium; Asset Pricing; Limited Participation |
| JEL: | E21 F32 F41 G12 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:pur:prukra:1266&r=upt |
| By: | Derks, Jean (Department of Knowledge Engineering); Peters, Hans (Department of Quantitative Economics); Sudhölter, Peter (Department of Business and Economics) |
| Abstract: | We consider several related set extensions of the core and the anticore of games with transferable utility. An efficient allocation is undominated if it cannot be improved, in a specific way, by sidepayments changing the allocation or the game. The set of all such allocations is called the undominated set, and we show that it consists of finitely many polytopes with a core-like structure. One of these polytopes is the L1-center, consisting of all efficient allocations that minimize the sum of the absolute values of the excesses. The excess Pareto optimal set contains the allocations that are Pareto optimal in the set obtained by ordering the sums of the absolute values of the excesses of coalitions and the absolute values of the excesses of their complements. The L1-center is contained in the excess Pareto optimal set, which in turn is contained in the undominated set. For three-person games all these sets coincide. These three sets also coincide with the core for balanced games and with the anticore for antibalanced games. We study properties of these sets and provide characterizations in terms of balanced collections of coalitions. We also propose a single-valued selection from the excess Pareto optimal set, the min-prenucleolus, which is defined as the prenucleolus of the minimum of a game and its dual. |
| Keywords: | Transferable utility game; core; anticore; core extension; min-prenucleolus |
| JEL: | C71 |
| Date: | 2012–01–06 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sdueko:2012_004&r=upt |