nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2012‒03‒14
eight papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Rational expectations in urban economics By Berliant, Marcus; Yu, Chia-Ming
  2. Portfolios and risk premia for the long run By Paolo Guasoni; Scott Robertson
  3. Asymptotics of robust utility maximization By Thomas Knispel
  4. A Generalization of Sen’s Unification Theorem: Avoiding the Necessity of Pairs and Triplets By He, Junnan
  5. Oil price forecasting under asymmetric loss By Pierdzioch, Christian; Rülke, Jan-Christoph; Stadtmann, Georg
  6. Willingness to Pay and Sensitivity to Time Framing: A Theoretical Analysis and an Application on Car Safety By Andersson, Henrik; Hammitt, James; Lindberg, Gunnar; Sundström, Kristian
  7. Cyclical Risk Aversion, Precautionary Saving and Monetary Policy By Bianca De Paoli; Pawel Zabczyk
  8. Optimal control of inequality under uncertainty By Martin Forster; Davide La Torre; Peter Lambert

  1. By: Berliant, Marcus; Yu, Chia-Ming
    Abstract: Canonical analysis of the classical general equilibrium model demonstrates the existence of an open and dense subset of standard economies that possess fully-revealing rational expectations equilibria. This paper shows that the analogous result is not true in urban economies under appropriate modifications for this field. An open subset of economies where none of the modified rational expectations equilibria fully reveals private information is found. There are two important pieces. First, there can be information about a location known by a consumer who does not live in that location in equilibrium, and thus the equilibrium rent does not reflect this information. Second, if a consumer’s utility depends only on information about their (endogenous) location of residence, perturbations of utility naturally do not incorporate information about other locations conditional on the consumer’s location of residence. Existence of equilibrium is proved. Space can prevent housing prices from transmitting information from informed to uninformed households, resulting in an inefficient outcome.
    Keywords: Urban Economics; General Equilibrium; Private Information; Rational Expectations
    JEL: R13 D82 D51
    Date: 2012–03–05
  2. By: Paolo Guasoni; Scott Robertson
    Abstract: This paper develops a method to derive optimal portfolios and risk premia explicitly in a general diffusion model for an investor with power utility and a long horizon. The market has several risky assets and is potentially incomplete. Investment opportunities are driven by, and partially correlated with, state variables which follow an autonomous diffusion. The framework nests models of stochastic interest rates, return predictability, stochastic volatility and correlation risk. In models with several assets and a single state variable, long-run portfolios and risk premia admit explicit formulas up the solution of an ordinary differential equation which characterizes the principal eigenvalue of an elliptic operator. Multiple state variables lead to a quasilinear partial differential equation which is solvable for many models of interest. The paper derives the long-run optimal portfolio and the long-run optimal pricing measures depending on relative risk aversion, as well as their finite-horizon performance.
    Date: 2012–03
  3. By: Thomas Knispel
    Abstract: For a stochastic factor model we maximize the long-term growth rate of robust expected power utility with parameter $\lambda\in(0,1)$. Using duality methods the problem is reformulated as an infinite time horizon, risk-sensitive control problem. Our results characterize the optimal growth rate, an optimal long-term trading strategy and an asymptotic worst-case model in terms of an ergodic Bellman equation. With these results we propose a duality approach to a "robust large deviations" criterion for optimal long-term investment.
    Date: 2012–03
  4. By: He, Junnan
    Abstract: This paper is concerned with the axiomatic foundation of the revealed preference theory. Many well-known results in literature rest upon the ability to choose over budget sets that contains only 2 or 3 elements, the situations which are not observable in real life. In order to give a more realistic approach, this paper shows that many of the famous consistency requirements, such as those proposed by Arrow, Sen, Samuelson etc., are equivalent if the domain of choice functions satisfy some set theoretical properties. And these properties, unions and inclusions for example, are proposed in a way that gives observability.
    Keywords: Revealed Preference Theory; Rationality; Ordering; Preference; Choice function
    JEL: D11 D01
    Date: 2011–11–10
  5. By: Pierdzioch, Christian; Rülke, Jan-Christoph; Stadtmann, Georg
    Abstract: Based on the approach advanced by Elliott et al. (Rev. Ec. Studies. 72, 1197-1125), we found that the loss function of a sample of oil price forecasters is asymmetric in the forecast error. Our findings indicate that the loss oil price forecasters incurred when their forecasts exceeded the price of oil tended to be larger than the loss they incurred when their forecast fell short of the price of oil. Accounting for the asymmetry of the loss function does not necessarily make forecasts look rational. --
    Keywords: oil price,forecasting,loss function,rationality of forecasts
    JEL: F31 D84
    Date: 2012
  6. By: Andersson, Henrik; Hammitt, James; Lindberg, Gunnar; Sundström, Kristian
    Abstract: Stated preference (SP) surveys attempt to obtain monetary values for non-market goods that reflect individuals’ “true” preferences. Numerous empirical studies suggest that monetary values from SP studies are sensitive to survey design and so may not reflect respondents’ true preferences. This study examines the effect of time framing on respondents’ willingness to pay (WTP) for car safety.We explore how WTP per unit risk reduction depends on the time period over which respondents pay and face reduced risk in a theoretical model and by using data from a Swedish contingent valuation survey. We find that WTP is sensitive to time framing; the theoretical model predicts that the effect is likely to be nontrivial, and empirical estimates from an annual scenario are about 70 percent higher than estimates from a monthly scenario.
    Keywords: Car safety, Contingent valuation, Time frame, Willingness to pay
    JEL: C52 D6 I1 Q50
    Date: 2011–10
  7. By: Bianca De Paoli; Pawel Zabczyk
    Abstract: This paper analyzes the conduct of monetary policy in an environment in which cyclical swings in risk appetite affect households' propensity to save. It uses a New-Keynesian model featuring external habit formation to show that taking note of precautionary saving motives justifies an accommodative policy bias in the face of persistent, adverse disturbances. Equally, policy should be more restrictive - i.e. `lean against the wind' - following positive shocks. Since the size of these `risk-adjustments' is increasing in the degree of macroeconomic volatility, ignoring this channel could lead to larger policy errors in turbulent times - with good luck translating into good policy.
    Keywords: precautionary saving, monetary policy, cyclical risk aversion, macro-finance, non-linearities
    JEL: E32 G12
    Date: 2012–03
  8. By: Martin Forster; Davide La Torre; Peter Lambert
    Abstract: We consider the optimal control of inequality under uncertainty, with a particular focus on income inequality. For an economy experiencing economic growth and random shocks, we show how a simple loss and `bequest' function may be combined to guide the expected level of inequality towards a pre-defined target within a finite planning horizon. Closed form solutions show that, the stronger the shocks to the income distribution, the more aggressive is policy. We discuss the results in the context of recent applied and policy literature on social inequality, globalisation and economic instability.
    Keywords: Globalisation; Inequality; Stochastic dynamic programming
    JEL: C61 D31 D63 I38
    Date: 2012–03

This nep-upt issue is ©2012 by Alexander Harin. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.