nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2013‒11‒09
six papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Dynamic Consistency and Ambiguity: A Reappraisal By HILL, Brian
  2. An application of wage bargaining to price negotiation with discount factors varying in time By Ahmet Ozkardas; Agnieszka Rusinowska
  3. Risk Measure Inference By Christophe Hurlin; Sebastien Laurent; Rogier Quaedvlieg; Stephan Smeekes
  4. The Farsighted Stable Set By Debraj Ray; Rajiv Vohra
  5. U.S. versus Sweden: The Effect of Alternative In-Work Tax Credit Policies on Labour Supply of Single Mothers By Aaberge, Rolf; Flood, Lennart
  6. A Microsimulation on Tax Reforms in LAC Countries: A New Approach Based on Full Expenditures By Carla Canelas; François Gardes; Silvia Salazar

  1. By: HILL, Brian
    Abstract: It is commonly argued that dynamic consistency, consequentialism and non-expected utility are incompatible. The first aim of this paper is to rebut such arguments, by targeting the implicit assumption that the relevant contingencies correspond to objective resolutions of uncertainty (that is, events in a state space). These are not necessarily the same as the contingencies that the decision maker envisages, and we argue that any reasonable notion of dynamic consistency involves the latter, rather than the former, sort of contingency. We formulate such a version of dynamic consistency and show it to be compatible with consequentialism and non-expected utility. We then analyze the economic consequences of this new perspective. On the one hand, it provides a principled justification for restrictions on non-expected utility models (such as that proposed by Epstein and Schneider (2003)) in applications to dynamic choice problems. On the other hand, it provides a new analysis of the issue of attitude to information; contra standard arguments, the value of information under non-expected utility is non-negative as long as the information offered does not compromise information that the decision maker had otherwise expected to receive. Finally, we give a representation theorem for the contingencies the decision maker envisages, in the case where he uses the maxmin expected utility rule.
    Keywords: Decision under Uncertainty; Dynamic Consistency; Dynamic Choice; Value of Information; Epistemic Contingency
    JEL: D81 D83
    Date: 2013–05–21
  2. By: Ahmet Ozkardas (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne); Agnieszka Rusinowska (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: We consider a non-cooperative price bargaining model between a monopolistic producer and a monopsonic consumer. The innovative element that our model brings to the existing literature on price negotiation concerns the parties' preferences which are not expressed by constant discount rates, but by sequences of discount factors varying in time. We assume that the sequence of discount rates of a party can be arbitrary, with the only restriction that the infinite series that determines the utility for the given party must be convergent. Under certain parameters, the price negociation model coincides with wage bargaining with the exogenous always strike decision. We determine the unique subgame perfect equilibrium in this model for no-delay strategies independent of the former history of the game. Then we relax the no-delay assumption and determine the highest equilibrium payoff of the seller and the lowest equilibrium payoff of the buyer for the general case. We show that the no-delay equilibrium strategy profiles support these extreme payoffs.
    Keywords: Price bargaining; alternating offers; varying discount rates; subgame perfect equilibrium
    Date: 2013–10
  3. By: Christophe Hurlin (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans); Sebastien Laurent (IAE Aix-en-Provence - Institut d'Administration des Entreprises - Aix-en-Provence - Université Paul Cézanne - Aix-Marseille III, GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - École des Hautes Études en Sciences Sociales [EHESS] - CNRS : UMR7316); Rogier Quaedvlieg (Maastricht University - univ. Maastricht); Stephan Smeekes (Maastricht University - univ. Maastricht)
    Abstract: We propose a widely applicable bootstrap based test of the null hypothesis of equality of two firms' Risk Measures (RMs) at a single point in time. The test can be applied to any market-based measure. In an iterative procedure, we can identify a complete grouped ranking of the RMs, with particular application to finding buckets of fi rms of equal systemic risk. An extensive Monte Carlo Simulation shows desirable properties. We provide an application on a sample of 94 U.S. financial institutions using the ΔCoVaR, MES and %SRISK, and conclude only the %SRISK can be estimated with enough precision to allow for a meaningful ranking.
    Keywords: Bootstrap; Grouped Ranking; Risk Measures; Uncertainty
    Date: 2013–10–28
  4. By: Debraj Ray; Rajiv Vohra
    Abstract: Harsanyi (1974) criticized the von Neumann-Morgenstern notion of a stable set on the grounds that it implicitly assumes coalitions to be shortsighted in evaluating their prospects. He proposed a modification of the dominance relation to incorporate farsightedness. In doing so, however, Harsanyi retained another feature of the stable set: that a coalition S can impose any imputation as long as its restriction to S is feasible for S. This implicitly gives an objecting coalition complete power to arrange the payoffs of players elsewhere, which is clearly unsatisfactory. While this assumption is absolutely innocuous for the classical stable set, it is of crucial significance for farsighted dominance. Our proposed modification of the Harsanyi set respects “coalitional sovereignty.” The resulting farsighted stable set is very different, both from that of Harsanyi or of von Neumann and Morgenstern. We provide a necessary and sufficient condition for the existence of a farsighted stable set containing just a single payoff allocation. This condition is weaker than assuming that the relative interior of the core is non-empty, but roughly establishes an equivalence between core allocations and the union of allocations over all singlepayoff farsighted stable sets. We state two conjectures: that farsighted stable sets exist in all transferable-utility games, and that when a single-payoff farsighted stable set exists, there are no farsighted stable sets containing multiple payoff allocations.
    Keywords: #
    Date: 2013
  5. By: Aaberge, Rolf (Research Department at Statistics Norway and ESOP, University of Oslo); Flood, Lennart (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: An essential difference between the design of the Swedish and the US in-work tax credit systems relates to their functional forms. Where the US earned income tax credit (EITC) is phased out and favours low and medium earnings, the Swedish system is not phased out and offers 17 and 7 per cent tax credit for low and medium low incomes and a lump-sum tax deduction equal to approximately 2300 USD for medium and higher incomes. The purpose of this paper is to evaluate the efficiency and distributional effects of these two alternative tax credit designs. We pay particular attention to labour market exclusion; i.e. individuals within as well as outside the labour force are included in the analysis. To highlight the importance of the joint effects from the tax and the benefit systems it appears particular relevant to analyse the labour supply behaviour of single mothers. To this end, we estimate a structural random utility model of labour supply and welfare participation. The model accounts for heterogeneity in consumption-leisure preferences as well as for heterogeneity and constraints in job opportunities. The results of the evaluation show that the Swedish system without phase-out generates substantial larger labour supply responses than the US version of the tax credit. Due to increased labour supply and decline in welfare participation we find that the Swedish reform is self-financing for single mothers, whereas a 10 per cent deficit follows from the adapted EITC version used in this study. However, where income inequality rises modestly under the Swedish tax credit system, the US version with phase-out leads to a significant reduction in the income inequality.
    Keywords: labour supply; single mothers; in-work tax credit; social assistance; random utility model
    JEL: I38 J22
    Date: 2013–10–28
  6. By: Carla Canelas (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne); François Gardes (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Silvia Salazar (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)
    Abstract: In this article, we propose a new method to estimate price effects on micro cross-sectional data using full prices that take into account household domestic production. We use behavioral microsimulations by subpopulations to analyze the redistributive impact of changes on Value Added Tax (VAT) rates in Ecuador and Guatemala. Utility analysis is used to evaluate the consequences on households welfare caused by these tax reforms. The proposed model solves the crucial problem of price data availability in developing countries. The estimates of the full price elasticities highlight the importance of the substitution between time and monetary expenditures within the households domestic production function and show that traditional approaches only tell half of the story. In general, the utility estimates seem to be consistent as they have the expected sign and follow the same pattern of changes in consumption.
    Keywords: Consumer demand; full prices; microsimulation; taxes; time-use; welfare
    Date: 2013–07

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