|
on Utility Models and Prospect Theory |
| By: | Arthur E. Attema (Erasmus University - Erasmus university); Werner B.F. Brouwer (Erasmus University - iBMG/iMTA - Erasmus university); Olivier L'Haridon (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes 1 - Université de Caen Basse-Normandie, IUF - Institut Universitaire de France - Ministère de l'Enseignement Supérieur et de la Recherche Scientifique) |
| Abstract: | It is well-known that expected utility (EU) has empirical deficiencies. Cumulative prospect, theory (CPT) has developed as an alternative with more descriptive validity. However, CPT's full, function had not yet been quantified in the health domain. This paper is therefore the first to, simultaneously measure utility of life duration, probability weighting, and loss aversion in this domain., We observe loss aversion and risk aversion for gains and losses, which for gains can be explained by, probabilistic pessimism. Utility for gains is almost linear. For losses, we find less weighting of, probability 1/2 and concave utility. This contrasts with the common finding of convex utility for, monetary losses. However, CPT was proposed to explain choices among lotteries involving monetary, outcomes. Life years are arguably very different from monetary outcomes and need not generate, convex utility for losses. Moreover, utility of life duration reflects discounting, causing concave utility. |
| Keywords: | Loss aversion; cumulative prospect theory; QALY model; Utility of life duration |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00866788&r=upt |
| By: | Frederik Herzberg (Center for Mathematical Economics, Bielefeld University) |
| Abstract: | Cerreia-Vioglio, Ghirardato, Maccheroni, Marinacci and Siniscalchi (Economic Theory, 48:341--375, 2011) have recently proposed a very general axiomatisation of preferences in the presence of ambiguity, viz. Monotonic Bernoullian Archimedean (MBA) preference orderings. This paper investigates the problem of Arrovian aggregation of such preferences -- and proves dictatorial impossibility results for both finite and infinite populations. Applications for the special case of aggregating expected-utility preferences are given. A novel proof methodology for special aggregation problems, based on model theory (in the sense of mathematical logic), is employed. |
| Keywords: | ambiguity, Knightian uncertainty, expected utility, Monotonic Bernoullian Archimedean (MBA) preferences, Arrovian social choice, Arrow's theorem, impossibility result, ultrafilter, ultraproduct |
| JEL: | D71 D81 C02 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:488&r=upt |
| By: | Ulrich Schmidt; Horst Zank |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:man:sespap:1324&r=upt |
| By: | Larry G. Epstein; Emmanuel Farhi; Tomasz Strzalecki |
| Abstract: | Though risk aversion and the elasticity of intertemporal substitution have been the subjects of careful scrutiny when calibrating preferences, the long-run risks literature as well as the broader literature using recursive utility to address asset pricing puzzles have ignored the full implications of their parameter specifications. Recursive utility implies that the temporal resolution of risk matters and a quantitative assessment of how much it matters should be part of the calibration process. This paper gives a sense of the magnitudes of implied timing premia. Its objective is to inject temporal resolution of risk into the discussion of the quantitative properties of long-run risks and related models. |
| JEL: | E0 G0 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19541&r=upt |
| By: | Lorenzo Bastianello; Alain Chateauneuf |
| Abstract: | In this paper we study the behaviour of decision makers who show, quoting Irving Fisher, preferences for advancing the timing of future satisfaction. We gave two definitions that could represent this kind of attitude and we studied their implications in three popular models used in decision theory, proposing alternatives to the usual concept of discounting. We found interesting links with the theory that studies the impossibility of aggregating infinite streams of income (or utility) keeping both strong monotonicity and equality among all generations, and with the notion of domination of a streams of income over another one at all interest rates. |
| Keywords: | Value-at-Risk (VaR); CAViaR approach; risk spillover; Granger causality. |
| JEL: | D90 |
| Date: | 2013–10–15 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:30&r=upt |
| By: | Hanming Fang (Department of Economics, University of Pennsylvania); Xun Tang (Department of Economics, University of Pennsylvania) |
| Abstract: | Bidders’ risk attitudes have key implications for choices of revenue-maximizing auction formats. In ascending auctions, bid distributions do not provide information about risk preference. We infer risk attitudes using distributions of transaction prices and participation decisions in ascending auctions with entry costs. Nonparametric tests are proposed for two distinct scenarios: first, the expected entry cost can be consistently estimated from data; second, the data does not report entry costs but contains exogenous variations of potential competition and auction characteristics. In the first scenario, we exploit the fact that the risk premium required for entry - the difference between ex ante expected profits from entry and the certainty equivalent .is strictly positive if and only if bidders are risk averse. Our test is based on identification of bidders’ ex ante profits. In the second scenario, our test builds on the fact that risk attitudes affect how equilibrium entry probabilities vary with observed auction characteristics and potential competition. We also show identification of risk attitudes in a more general model of ascending auctions with selective entry, where bidders receive entry-stage signals that are correlated with private values. |
| Keywords: | Ascending auctions, Risk attitudes, Endogenous entry, Tests |
| JEL: | D44 C12 C14 |
| Date: | 2013–09–09 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:13-056&r=upt |
| By: | Marco Marini (Department of Computer, Control and Management Engineering, Università "La Sapienza" Roma); Paolo Polidori (Department of Law, University of Urbino “Carlo Bo”); Davide Ticchi (IMT Institute for Advanced Studies Lucca); Désirée Teobaldelli (Department of Law, University of Urbino “Carlo Bo”) |
| Abstract: | One of the standard predictions of the agency theory is that more incentives can be given to agents with lower risk aversion. In this paper we show that this relationship may be absent or reversed when the technology is endogenous and projects with a higher e¢ ciency are also riskier. Using a modi ed version of the Holmstrom and Milgroms (1987) framework, we obtain that lower agents risk aversion unambiguously leads to higher incentives when the technology function linking e¢ ciency and riskiness is elastic, while the risk aversion-incentive relation- ship can be positive when this function is rigid. |
| Keywords: | Principal-agent, Incentives, Risk aversion, Endogenous technolog |
| JEL: | D82 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:urb:wpaper:13_04&r=upt |
| By: | Thomas Meissner; ; ; |
| Abstract: | This paper tests how subjects behave in an intertemporal consumption/saving experiment when borrowing is allowed and whether subjects treat debt differently than savings. Two treatments create environments where either saving or borrowing is required for optimal consumption. Since both treatments share the same optimal consumption levels, actual consumption choices can be directly compared across treatments. The experimental findings imply that deviations from optimal behavior are higher when subjects have to borrow than when they have to save in order to consume optimally, suggesting debt-aversion. Signifiant underconsumption is observed when subjects have to borrow in order to reach optimal consumption. Only weak evidence is found suggesting that subjects over-consume when saving is necessary for optimal consumption. |
| Keywords: | Laboratory Experiment, Intertemporal Consumption, Consumption Smoothing, Debt Aversion |
| JEL: | C91 D81 E21 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2013-045&r=upt |
| By: | Nuno Silva (GEMF/ Faculty of Economics University of Coimbra, Portugal) |
| Abstract: | In this paper, we studied the equity premium predictability in eleven EuroZone countries. Besides some traditional predictive variables, we have also chosen two other that, to our knowledge, have never been previously used in this literature: the change in the OECD normalized composite leading indicator and the change in the OECD business confidence indicator. The OECD indicators have shown a good performance, in particular during the early stages of the recent financial crisis. We also computed the utility gains that a mean-variance investor would have obtained, if he has used these forecasting variables, and concluded that, for most countries, the utility gains would have been considerable. |
| Keywords: | Internation stock markets, Equity premia predictability, Asset allocation |
| JEL: | C22 C53 G11 G17 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:gmf:wpaper:2013-22.&r=upt |
| By: | Casey B. Mulligan |
| Abstract: | Uncertainty and its composition can affect the demand for social insurance, and thereby the labor market. This paper shows that small to medium-sized increases in uncertainty or risk aversion are enough to recommend an expansion of the safety net that would be broadly similar to the actual safety net expansions, which significantly depressed the labor market. Labor market effects of uncertainty through investment and insurance channels are also examined with employer and employee labor wedges. |
| JEL: | D33 E24 I38 J22 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19553&r=upt |
| By: | Christopher Gertz (Center for Mathematical Economics, Bielefeld University) |
| Abstract: | I analyze a monopolistic model of quality uncertainty but with the possibility of information acquisition on the consumer side. Information is costly and its amount is chosen by the consumer. The analysis of Bayesian equilibria shows the possibility of three equilibrium classes, only one of which leaves positive utility to the consumer. The classic adverse selection results of these markets are weakened in this situation. I show that cheaper information does not necessarily benefit the consumer but can instead rule out the buyer-friendly and welfare maximizing equilibria. Moreover, making quality search arbitrarily efficient does not lead to sure selling of the high quality product. A sustainable adverse selection effect, though weaker than in the classical model, remains even in the limit. |
| Keywords: | Quality uncertainty, Price signaling, Adverse selection, Information acquisition, Two-sided incomplete information |
| JEL: | C72 D42 D82 D83 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:487&r=upt |
| By: | D'Haultfoeuille, Xavier; Durrmeyer, Isis; Février, Philippe |
| Abstract: | In this paper, we investigate whether French consumers have modified their preferences towards environmentally-friendly vehicles between 2003 and 2008. We estimate a model of demand for automobiles incorporating both consumers' heterogeneity and CO2 emissions of the vehicles. Our results show that there has been a shift in preferences towards low-emitting cars, with an average increase of 367 euros of the willingness to pay for a reduction of 10 grams of carbon dioxide per kilometer. We also stress a large heterogeneity in the evolution of preferences between consumers. Rich and young people are more sensitive to environmental issues, and our results are in line with votes for the green party at the presidential elections. We relate these changes with two environmental policies that were introduced at these times, namely the obligation of indicating energy labels by the end of 2005 and a feebate based on CO2 emissions of new vehicles in 2008. Our results suggest that such policies have been efficient tools to shift consumers utility towards environmentally-friendly goods, the shift in preferences accounting for 20% of the overall decrease in average CO2 emissions of new cars on the period. |
| Keywords: | environmental policy; consumers' preferences; CO2 emissions; automobiles |
| JEL: | D12 H23 L62 Q51 |
| Date: | 2013–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:422&r=upt |
| By: | Beine, M.; Bricongne,J-C.; Bourgeon, P. |
| Abstract: | Traditional theories of integration such as the optimum currency area approach attribute a prominent role to international labour mobility in coping with relative economic fluctuations between countries. However, recent studies on international migration have overlooked the role of short-run factors in explaining international migration flows. This paper aims to fill that gap. We first derive a model of optimal migration choice based on an extension of the traditional Random Utility Model. Our model predicts that an improvement in the economic activity in a potential destination country relative to any origin country may trigger some additional migration flows on top of the impact exerted by long-run factors such as the wage differential or the bilateral distance. Compiling a dataset with annual gross migration flows between 30 developed origin and destination countries over the 1980-2010 period, we empirically test the magnitude of the effect of short-run factors on bilateral flows. Our econometric results indicate that relative aggregate fluctuations and employment rates affect the intensity of bilateral migration flows. We also provide compelling evidence that the Schengen agreements and the introduction of the euro significantly raised the international mobility of workers between the member countries. |
| Keywords: | International Migration, Business cycles, OECD countries, Income Maximization. |
| JEL: | F22 O15 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:453&r=upt |
| By: | Antoine Leblois (CIRED - Centre International de Recherche sur l'Environnement et le Développement - Centre de coopération internationale en recherche agronomique pour le développement [CIRAD] : UMR56 - CNRS : UMR8568 - École des Hautes Études en Sciences Sociales [EHESS] - École des Ponts ParisTech (ENPC) - AgroParisTech, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X); Philippe Quirion (CIRED - Centre International de Recherche sur l'Environnement et le Développement - Centre de coopération internationale en recherche agronomique pour le développement [CIRAD] : UMR56 - CNRS : UMR8568 - École des Hautes Études en Sciences Sociales [EHESS] - École des Ponts ParisTech (ENPC) - AgroParisTech); Benjamin Sultan (LOCEAN - Laboratoire d'Océanographie et du Climat : Expérimentations et Approches Numériques - Institut de recherche pour le développement [IRD] - INSU - CNRS : UMR7159 - Université Pierre et Marie Curie (UPMC) - Paris VI - Muséum National d'Histoire Naturelle (MNHN)) |
| Abstract: | In the Sudano-sahelian zone, which includes Northern Cameroon, the inter-annual variability of the rainy season is high and irrigation is scarce. As a conse- quence, bad rainy seasons have a detrimental impact on crop yield. In this paper, we assess the risk mitigation capacity of weather index-based insurance for cotton farmers. We compare the ability of various indices, mainly based on daily rainfall, to increase the expected utility of a representative risk-averse farmer. We first give a tractable definition of basis risk and use it to show that weather index-based insurance is associated with a large basis risk. It has thus limited potential for income smoothing, whatever the index or the utility function. Second, in accordance with the existing agronomical literature we find that the length of the cotton growing cycle, in days, is the best performing index considered. Third, we show that using observed cotton sowing dates to define the length of the grow- ing cycle significantly decreases the basis risk, compared to using simulated sowing dates. Finally we found that the gain of the weather-index based insurance is lower than that of hedging against cotton price fluctuations which is provided by the national cotton company. This casts doubts on the strategy of international institutions, which support weather-index insurances in cash crop sectors while pushing to liberalisation without recommending any price stabilization schemes. |
| Keywords: | Agriculture, weather, index-based insurance. |
| Date: | 2013–03–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:ciredw:hal-00796528&r=upt |
| By: | Raghbendra Jha; Woojin Kang; Hari K. Nagarajan; Kailash C. Pradhan |
| Abstract: | Using ARIS/REDS data set for 2006 for rural India this paper models household vulnerability as expected utility and its components. We conclude, first, that between the years 1999 and 2006 household vulnerability is most explained by poverty and idiosyncratic components. Second, for risk coping strategy, households rely heavily on informal instrument such as their own saving, transfers or capital depletion. However, they also try to cope with covariate risks by participating in government programmes. Third, household consumption is highly covariate with income. This implies that existing informal insurance instruments are not sufficient to protect household consumption against income shocks. Fourth, a coping strategy using government programmes has vulnerability (idiosyncratic risk component) reducing effects. Finally, there is a strong case for the establishment of strong safety nets in Indian villages. The existing informal strategy is inadequate as a consumption insurance mechanism whereas government programmes are found to reduce vulnerability induced by idiosyncratic shocks. However, access to such programmes is highly constrained. The expansion of suitably designed government programs has the potential of protecting households efficiently from negative shocks. |
| Keywords: | Vulnerability as Expected Utility, Coping Strategy, Economic Growth, Social Safety nets |
| JEL: | D12 D18 I32 I38 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:pas:asarcc:2013-12&r=upt |