nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2013‒10‒05
eight papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Intuition and Reasoning in Choosing Ambiguous and Risky Lotteries By Ralf Bergheim; Michael W.M. Roos
  2. An Axiomatization of Choquet Expected Utility with Cominimum Independence By Takao Asano; Hiroyuki Kojima
  3. Inequality-adjusted gender wage differentials in Germany By SELEZNEVA Ekaterina; VAN KERM Philippe
  4. Voice Effects on Attitudes towards an Impartial Decision Maker: Experimental Evidence By Marco Kleine; Pascal Langenbach; Lilia Zhurakhovska
  5. On Repeated Moral Hazard with a Present Biased Agent By Luigi Balletta; Giovanni Immordino
  6. Corporate Bond Clawbacks as Contingent Capital By Fernando Díaz; Gabriel Ramírez; Kenneth Daniels
  7. Approximate variational inference for a model of social interactions By Angelo Mele
  8. Voting for income-immiserizing redistribution in the Meltzer-Richard model By Barnett, Richard C.; Bhattacharya, Joydeep; Bunzel, Helle

  1. By: Ralf Bergheim; Michael W.M. Roos
    Abstract: This paper focuses on information acquisition and individual decision making in ambiguous situations and presents a novel experimental design which may help to tackle open questions from a fresh perspective. Instead of giving subjects the choice between risky and ambiguous Ellsberg urns, we let them choose between a safe option and a risky lottery, whose risk is a priori unknown to subjects. By acquiring information about the probability distribution of the lottery’s payoffs, subjects can reduce or even eliminate the ambiguity and turn the decision situation into one of risk. Under the assumption that an ambiguity averse subject should reduce ambiguity within a decision process we predicted that these subjects would request more information. Moreover, we investigate whether the relation between attitudes towards risk and ambiguity is linked to intuitive and deliberate thinking. Based on a detailed analysis of subjects’ information acquisition and decision processes we do not find that those subjects showing ambiguity aversion in an urn experiment based on Halevy (2007) significantly reduce the ambiguity more than others. More intuitive subjects acquire less information and are more likely to avoid the risky lottery. Intuition seems to be negatively correlated with risk aversion, but not with ambiguity aversion. Moreover, we find a positive correlation between risk and ambiguity aversion.
    Keywords: Ambiguity aversion; risk aversion; uncertainty; experiment; decision making; binary system of thinking
    JEL: C91 D03 D81
    Date: 2013–09
  2. By: Takao Asano (Faculty of Economics, Okayama University); Hiroyuki Kojima (Department of Economics, Teikyo University)
    Abstract: This paper proposes a class of independence axioms for simple acts. By introducing the E-cominimum independence axiom that is stronger than the comonotonic independence axiom but weaker than the independence axiom, we provide a new axiomatization theorem of simple acts within the framework of Choquet Expected Utility. Furthermore, in order to provide the axiomatization of simple acts, we generalize Kajii, Kojima, and Ui (2007, Journal of Mathematical Economics) into an infinite state space. Our axiomatization theorem relates Choquet Expected Utility to Multi-prior Expected Utility through the core of a capacity that is explicitly derived within our framework. Our result in this paper also derives Gilboa (1989, Econometrica), Eichberger and Kelsey (1999, Theory and Decision), and Rohde (2010, Social Choice and Welfare) as a corollary.
    Keywords: Cominimum Additivity; Cominimum Independence; Choquet Expected Utility; Multi-prior Expected Utility; Core; E-Capacity Expected Utility
    JEL: C71 D81 D90
    Date: 2013–09
  3. By: SELEZNEVA Ekaterina; VAN KERM Philippe
    Abstract: This paper exploits data from the German Socio-Economic Panel (SOEP) to re-examine the gender wage gap in Germany on the basis of inequality-adjusted measures of wage differentials which fully account for gender differences in pay distributions. The inequality-adjusted gender pay gap measures are significantly larger than suggested by standard indicators, especially in East Germany. Women appear penalized twice, with both lower mean wages and greater wage inequality. A hypothetical risky investment question collected in 2004 in the SOEP is used to estimate individual risk aversion parameters and benchmark the ranges of inequality-adjusted wage differentials measures.
    Keywords: gender gap; wage differentials; wage inequality; expected utility; risk aversion; East and West Germany; SOEP; Singh-Maddala distribution; copula-based selection model
    JEL: D63 J31 J70
    Date: 2013–09
  4. By: Marco Kleine (Max Planck Institute for Research on Collective Goods, Bonn); Pascal Langenbach (Max Planck Institute for Research on Collective Goods, Bonn); Lilia Zhurakhovska (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: The opportunity to voice one’s opinion about a decision is a fundamental aspect of procedural fairness and applies to a large variety of economic interactions. Voice may influence decision makers, but at the same time it shapes behavior of those who can voice their opinion. We study the latter effect in a laboratory experiment. More precisely, we analyze the impact of voicing one’s opinion in a decision making process on people’s attitude towards an impartial decision maker whose judgment is not biased by any personal stake. The attitude is measured by generosity towards the decision maker in a dictator game that follows the decision making process. We show that voice procedures substantially improve the attitude towards the decision maker: average transfers are 90% higher in voice treatments than in baseline. And importantly, these positive voice effects in terms of higher transfers occur irrespectively of the decision made by the decision maker. Hence, subjects seem to derive utility merely from stating their opinion rather than from influencing the decision in their favor. In that regard, our results are in contrast to previous findings from settings with self-interested decision makers (e.g., principal-agent relationships), in which voice fosters positive reciprocal behavior for favorable outcomes, as well as negative reciprocal behavior for unfavorable outcomes.
    Keywords: fairness, Communication, voice, procedure, impartial decision maker, participative decision making, laboratory experiment
    JEL: D63 K23 D23 K40 C91 D03
    Date: 2013–07
  5. By: Luigi Balletta (Università di Palermo); Giovanni Immordino (Università di Salerno and CSEF)
    Abstract: This paper introduces time inconsistent preferences into a moral hazard setting where the agent is risk-averse. We derive a necessary optimality condition on the consumption allocation that is different from the so-called Inverse Euler Equation of Rogerson (1985). Specifically, inverse marginal utility is not a martingale, rather it follows a partial adjustment process. If the bias for the present is sufficiently large the optimal allocation will leave the agent with the desire to borrow. We extend the analysis to the case in which the principal does not know if the agent is time consistent or not. Finally, we show that in a setting with a risk-neutral agent and limited liability everything is as if the principal faces a time consistent agent.
    Keywords: repeated moral hazard, time-inconsistency
    JEL: D82 D03 E21 D86
    Date: 2013–09–25
  6. By: Fernando Díaz (Facultad de Economía y Empresa, Universidad Diego Portales); Gabriel Ramírez (Coles College of Business, Kennesaw State University); Kenneth Daniels (Coles College of Business, Kennesaw State University)
    Abstract: We propose a clawback-type security (COCLA) as an alternative source of contingent capital for banks. We develop a equilibrium model that contains several distinctive features not found in the existing literature. A bank owner/manager maximizes her expected utility by choosing the bank’s loans supply and the amount of junior debt and by exercising effort to screen credit quality of borrowers. The manager has the choice to convert and the decision results from the trade off she faces between the private benefits of control and the expected costs of financial distress, thus, getting around the so called “trigger problem”. We show that the clawback conversion rate that maximizes the manager/owner expected utility, the level of her effort and amount of loans is 30%. Our model endogenizes many features of the actual decision problems faced by banks and provides for a security that is socially beneficial as the credit for consumers is increased when compared with the outcomes of simply using straight subordinated or convertible debt. The results of the model are robust and calibration of the model produces bank asset and debt structures that are very close to that of the average top 60 largest banks in the USA.
    Date: 2013–09
  7. By: Angelo Mele (Johns Hopkins University - Carey Business School)
    Abstract: This paper proposes approximate variational inference methods for estimation of a strategic model of social interactions. Players interact in an exogenous network and sequentially choose a binary action. The utility of an action is a function of the choices of neighbors in the network. I prove that the interaction process can be represented as a potential game and it converges to a unique stationary equilibrium distribution. However, exact inference for this model is infeasible because of a computationally intractable likelihood, which cannot be evaluated even when there are few players. To overcome this problem, I propose variational approximations for the likelihood that allow approximate inference. This technique can be applied to any discrete exponential family, and therefore it is a general tool for inference in models with a large number of players. The methodology is illustrated with several simulated datasets and compared with MCMC methods.
    Keywords: Variational approximations, Bayesian Estimation, Social Interactions
    JEL: D85 C13 C73
    Date: 2013–09
  8. By: Barnett, Richard C.; Bhattacharya, Joydeep; Bunzel, Helle
    Abstract: This paper argues that income received via redistributive transfers, unlike labor income, requires no direct sacrifice of leisure; this makes it attractive to many voters even if it leaves them poorer. This point is made within the classic Meltzer and Richard (1981) model wherein heterogeneous voters evaluate an income-redistribution program that finances a lump-sum transfer to all via a distorting income tax. The political-equilibrium policy under majority rule is the tax most preferred, utility-wise, by the median voter. She, and many poorer voters, may support income redistribution that, ironically, leaves them poorer in income terms but with higher utility.
    Keywords: income redistribution; voting; Meltzer-Richard
    JEL: D72 E6 H2
    Date: 2013–09–30

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