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on Utility Models and Prospect Theory |
| By: | Laurens Cherchye; Thomas Demuynck; Bram De Rock |
| Abstract: | We present necessary and sufficient revealed preference conditions to verify whether a finite data seton nonlinear budget sets is consistent with the maximization of a quasi–concave utility function. Ourresults can be used to test for convexity of the underlying preference relation. We also show that in manysettings, our conditions are easy to use in practical applications. |
| Keywords: | quasi-concavity; convex preferences; nonlinear budget sets; revealed preference conditions |
| JEL: | C14 D11 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/133538&r=upt |
| By: | Howard Kunreuther; Geoffrey Heal; Myles Allen; Ottmar Edenhofer; Christopher B. Field; Gary Yohe |
| Abstract: | The selection of climate policies should be an exercise in risk management reflecting the many relevant sources of uncertainty. Studies of climate change and its impacts rarely yield consensus on the distribution of exposure, vulnerability, or possible outcomes. Hence policy analysis cannot effectively evaluate alternatives using standard approaches such as expected utility theory and benefit-cost analysis. This Perspective highlights the value of robust decision-making tools designed for situations, such as evaluating climate policies, where generally agreed-upon probability distributions are not available and stakeholders differ in their degree of risk tolerance. This broader risk management approach enables one to examine a range of possible outcomes and the uncertainty surrounding their likelihoods. |
| JEL: | Q54 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18607&r=upt |
| By: | Verena Jung; Sascha L. Schmidt; Benno Torgler |
| Abstract: | We explore the attitude towards risky career choices of young people in highly competitive environments. We empirically test which factors influence young elite athletes' tendency towards choosing a high-risk career option over a lower risk one; looking at the attitudes, of close to 1000 soccer players in the German "Bundesliga" professional clubs' Youth Academies, towards making real-life decisions. Generally, they face the decision early on as to whether or not they should risk quitting school to solely focus on a professional soccer career. Our study confirms that elements of expected utility, assessment of the likelihood of achievement of the aspired career as well as the potential benefit derived from this decision, explain risk-taking in competitive environments. The longer an individual survives the continuous selection process in the competitive environment, the more he thinks that he will eventually succeed - despite the increasing opportunity costs of quitting a low-risk alternative career. Initial success in the selection processes is a key trigger for the tendency to choose a career in winner-take-all markets. |
| Keywords: | Career choices; Risk attitude; Risk perception; Professional athletes; Young athletes; Opportunity cost; integration |
| JEL: | J24 J15 D81 D83 D84 L83 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:cra:wpaper:2012-20&r=upt |
| By: | Francois Gourio |
| Abstract: | Credit spreads are large, volatile and countercyclical, and recent empirical work suggests that risk premia, not expected credit losses, are responsible for these features. Building on the idea that corporate debt, while safe in ordinary recessions, is exposed to economic depressions, this paper embeds a trade-off theory of capital structure into a real business cycle model with a small, exogenously time-varying risk of economic disaster. The model replicates the level, volatility and cyclicality of credit spreads, and variation in the corporate bond risk premium amplifies macroeconomic fluctuations in investment, employment and GDP. |
| Keywords: | Risk - Mathematical models ; Credit ; Debt |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2012-07&r=upt |
| By: | Gene Amromin; Steven Sharpe |
| Abstract: | Data obtained from monthly Gallup/UBS surveys from 1998-2007 and from a special supplement to the Michigan Surveys of Consumer Attitudes, run in 22 monthly surveys between 2000-2005, are used to analyze stock market beliefs and portfolio choices of household investors. We show that the key variables found to be positive predictors of actual stock returns in the asset-pricing literature are also highly correlated with investor’s reported expected returns, but with the opposite sign. Moreover, analysis of the micro data indicates that expectations of both risk and returns on stocks are strongly influenced by perceptions of economic conditions. ; In particular, when investors believe macroeconomic conditions are more expansionary, they tend to expect both higher returns and lower volatility. This is difficult to reconcile with the canonical view that expected returns on stocks rise during recessions to compensate household investors for increased exposure or sensitivity to macroeconomic risks. Finally, the relevance of these investors’ reported expectations is supported by the finding of a significant link between their expectations and portfolio choices. In particular, we show that portfolio equity positions tend to be higher for those respondents that anticipate higher expected returns or lower uncertainty. |
| Keywords: | Stocks ; Macroeconomics - Econometric models ; Risk - Mathematical models |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2012-08&r=upt |
| By: | Vanessa Mertins; Agnes Baeker (Institute for Labour Law and Industrial Relations in the EU, University of Trier) |
| Abstract: | Incentive schemes not only influence the effort provision of workers, but might also induce sorting. As drivers of self-selection, the literature mainly focuses on measures of productivity; however, other variables, such as preferences, beliefs and personality, also play a role. With this paper, we contribute to the literature on drivers of self-selection by analyzing the role of perceived wage risks as potential influences on the sorting decision. To this end, we study a sorting decision between two variable compensation systems, where both options carry wage risks. Specifically, we look at sorting between individual piece rates and team piece rates. Using experimental data, we find evidence for both risk diversification considerations and free-riding concerns (i.e., risk of teaming-up with low-productive teammates) as drivers of self-selection. However, our data does not support the concern of our experimental subjects that others actually reduce their effort when working under team compensation, as compared to individual-based compensation. |
| Keywords: | Risk perception, Sorting, Preferred rewards, Productivity |
| JEL: | M52 J33 C91 D81 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:iaa:dpaper:201208&r=upt |
| By: | Harold L. Cole; Soojin Kim; Dirk Krueger |
| Abstract: | This paper constructs a dynamic model of health insurance to evaluate the short- and long run effects of policies that prevent firms from conditioning wages on health conditions of their workers, and that prevent health insurance companies from charging individuals with adverse health conditions higher insurance premia. Our study is motivated by recent US legislation that has tightened regulations on wage discrimination against workers with poorer health status (Americans with Disability Act of 2009, ADA, and ADA Amendments Act of 2008, ADAAA) and that will prohibit health insurance companies from charging different premiums for workers of different health status starting in 2014 (Patient Protection and Affordable Care Act, PPACA). In the model, a trade-off arises between the static gains from better insurance against poor health induced by these policies and their adverse dynamic incentive effects on household efforts to lead a healthy life. Using household panel data from the PSID we estimate and calibrate the model and then use it to evaluate the static and dynamic consequences of no-wage discrimination and no-prior conditions laws for the evolution of the cross-sectional health and consumption distribution of a cohort of households, as well as ex-ante lifetime utility of a typical member of this cohort. In our quantitative analysis we find that although a combination of both policies is effective in providing full consumption insurance period by period, it is suboptimal to introduce both policies jointly since such policy innovation induces a more rapid deterioration of the cohort health distribution over time. This is due to the fact that combination of both laws severely undermines the incentives to lead healthier lives. The resulting negative effects on health outcomes in society more than offset the static gains from better consumption insurance so that expected discounted lifetime utility is lower under both policies, relative to only implementing wage nondiscrimination legislation. |
| JEL: | E61 H31 I18 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18572&r=upt |