nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2014‒01‒10
six papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Regular economies with ambiguity aversion. By Noé Biheng; Jean-Marc Bonnisseau
  2. Evolution, empowerment and emancipation: How societies ascend the utility ladder of freedoms By Christian Welzel; Ronald Inglehart
  3. The Construction of Morals By Daniel L. Chen; Susan Yeh
  4. Rising support for reproductive freedoms: emancipatory breakthroughs into a bulwark of tradition By Amy C. Alexander; Christian Welzel; Ronald Inglehart
  5. Optimal Investment with Transaction Costs and Stochastic Volatility By Maxim Bichuch; Ronnie Sircar
  6. An Economical Business-Cycle Model By Pascal Michaillat; Emmanuel Saez

  1. By: Noé Biheng (Centre d'Economie de la Sorbonne); Jean-Marc Bonnisseau (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: We consider a family of exchange economies where consumers have multiprior preferences representing their ambiguity aversion. Under a linear independence assumption, we prove that regular economies are generic. Regular economies exhibit enjoyable properties: odd finite number of equilibrium prices, local constancy of this number and local differentiable selections of the equilibrium prices. Thus, even if ambiguity aversion is represented by non-differentiable multiprior preferences, economies retain generically the properties of the differentiable approach.
    Keywords: Demand function, general equilibrium, ambiguity aversion, multiprior preferences, regular economies, Lipschitz behavior.
    JEL: C6 D4 D5
    Date: 2013–12
  2. By: Christian Welzel (Center for the Study of Democracy, Leuphana University, Scharnhorststr.); Ronald Inglehart (Higher School of Economics)
    Abstract: This article presents a new theory of development that unifies disparate insights into a single framework, focusing on human empowerment—a process that emancipates people from domination. Human empowerment sets in when mass-scale technological progress widens ordinary people’s ‘action resources.’ As this happens, life turns from a source of threats into a source of opportunities, and societies climb the utility ladder of freedoms: universal freedoms become instrumental to taking advantage of what a more promising life offers. Accordingly, people adopt ‘emancipative values’ that emphasize universal freedoms. As the utility and value of freedoms rise, ‘civic entitlements’ that guarantee these become undeniable at some point. Human empowerment thus proceeds as the sequential growth in the utility, value and guarantee of freedoms (sequence thesis). Because universal freedoms are a reciprocal good that flourishes through mutual recognition, the utility ladder of freedoms is a social ladder: people climb it in alliance with like-minded others who share similar utilities (solidarity thesis). Historically speaking, human empowerment on a mass scale started only recently because civilization matured late where natural conditions bestow an initial utility on freedoms that has been absent elsewhere (initiation thesis). However, globalization is breaking human empowerment free from its confinement to the initially favourable conditions (contagion thesis). Together, these theses form an evolutionary theory of emancipation. After unfolding this theory, the article presents evidence in support of its major propositions.
    Keywords: action resources - civic entitlements - civilization process - cool-water condition - democratization - economic development - emancipation theory - emancipative values - human empowerment - social evolution - technological progress - utility ladder of freedoms
    JEL: E11
    Date: 2013
  3. By: Daniel L. Chen (ETH Zurich); Susan Yeh (George Mason University School of Law)
    Abstract: When do policies generate expressive or backlash effects? Recent economic models suggest that where a proscribed activity is prevalent, permissive laws liberalize attitudes toward partakers while increasing utility. The opposite occurs in communities where the proscribed activity is rare. To test these predictions, we randomize data entry workers to transcribe newspaper summaries of liberal or conservative court decisions about obscenity. We find that liberal obscenity decisions liberalize individual and perceived community standards and increase utility. Yet religious workers become more conservative in their values, identify as more Republican, view community standards as becoming more liberal, and report lower utility. Workers update beliefs about the prevalence of sexual activities differently in response to liberal or conservative decisions. These results provide causal evidence for the law having indirect social effects that may amplify or attenuate deterrence effects and suggest that legitimacy of law can affect utility and self-identification. Length: 58
    Keywords: obscenity law, belief updating, values, norms, sexual risk
    JEL: D83 K1 K42 Z1
    Date: 2013–11
  4. By: Amy C. Alexander (; Christian Welzel (Center for the Study of Democracy, Leuphana University, Scharnhorststr.); Ronald Inglehart (Higher School of Economics)
    Abstract: This article presents evidence for a rising emancipatory spirit, across generations and around the world, in a life domain in which traditional family, fertility and sex (FFS) norms have been most resistant to emancipatory gains since the ages: reproductive freedoms. We propose an explanation of rising emancipative values that integrates several theoretical approaches into a single idea—the utility ladder of freedoms. Specifically, we suggest that objectively improving living conditions--from rising life expectancies to broadening education to better technologies—transform the nature of life from a source of threats to suffer into a source of opportunities to thrive. As living conditions begin to hold more promise for increasing population segments, societies climb the utility ladder of freedoms: supporting universal freedoms becomes increasingly instrumental to use the opportunities that a more promising life offers. This trend has begun to spill over into a life domain in which traditional FFS norms have until recently been able to block emancipatory gains: reproductive freedoms. We present (1) cross-national, (2) longitudinal, (3) generational and (4) multi-level evidence on an unprecedentedly broad basis in support of this theory.
    Keywords: emancipative values - existential opportunities - reproductive freedoms - secular values - sex norms - utility ladder of freedoms
    JEL: E11
    Date: 2013
  5. By: Maxim Bichuch; Ronnie Sircar
    Abstract: Two major financial market frictions are transaction costs and uncertain volatility, and we analyze their joint impact on the problem of portfolio optimization. When volatility is constant, the transaction costs optimal investment problem has a long history, especially in the use of asymptotic approximations when the cost is small. Under stochastic volatility, but with no transaction costs, the Merton problem under general utility functions can also be analyzed with asymptotic methods. Here, we look at the long-run growth rate problem when both frictions are present, using separation of time scales approximations. This leads to perturbation analysis of an eigenvalue problem. We find the first term in the asymptotic expansion in the time scale parameter, of the optimal long-term growth rate, and of the optimal strategy, for fixed small transaction costs
    Date: 2014–01
  6. By: Pascal Michaillat; Emmanuel Saez
    Abstract: We construct a microfounded, dynamic version of the IS-LM-Phillips curve model by adding two elements to the money-in-the-utility-function model of Sidrauski (1967). First, real wealth enters the utility function. The resulting Euler equation describes consumption as a decreasing function of the interest rate in steady state–the IS curve. The demand for real money balances describes consumption as an increasing function of the interest rate in steady state–the LM curve. The intersection of the IS and LM curves defines the aggregate demand (AD) curve. Second, matching frictions in the labor market create unemployment. The aggregate supply (AS) curve describes output sold for a given market tightness. Tightness adjusts to equalize AD and AS curve for any price process. With a rigid price process, this steady-state equilibrium captures Keynesian intuitions. Demand and supply shocks affect tightness, unemployment, consumption, and output. Monetary policy affects aggregate demand and can be used for stabilization. Monetary policy is ineffective in a liquidity trap with zero nominal interest rate. In contrast, with a flexible price process, aggregate demand and monetary policy are irrelevant when the nominal interest rate is positive. In a liquidity trap, monetary policy is useful if it can increase inflation. We discuss equilibrium dynamics under a Phillips curve describing the slow adjustment of prices to their flexible level in the long run.
    JEL: E12 E13 E24 E41 E52
    Date: 2014–01

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