nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2014‒05‒24
six papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Flipping a coin: Theory and evidence By Dwenger, Nadja; Kübler, Dorothea; Weizsäcker, Georg
  2. Randomization and Dynamic Consistency By Jürgen Eichberger; Simon Grant; David Kelsey
  3. Preferences and beliefs in a sequential social dilemma: A within-subjects analysis By Blanco, Mariana; Engelmann, Dirk; Koch, Alexander K.; Normann, Hans-Theo
  4. Institutions, experiences and inflation aversion By Berleman, Michael; Enkelmann, Sören
  5. On the Single-Valuedness of the Pre-Kernel By Meinhardt, Holger Ingmar
  6. A computational model of optimal commodity taxation By John T. Revesz

  1. By: Dwenger, Nadja; Kübler, Dorothea; Weizsäcker, Georg
    Abstract: We investigate the possibility that a decision-maker prefers to avoid making a decision and instead delegates it to an external device, e.g., a coin flip. In a series of experiments our participants often choose a stochastically dominated lottery between outcomes, contradicting most theories of choice such as expected utility. A large data set on university applications in Germany shows a choice pattern that is consistent with a preference for randomization, entailing substantial allocative consequences. The findings are consistent with our theory of responsibility aversion. --
    Keywords: Stochastic dominance violations,individual decision making,university choice,matching
    JEL: D03 D01
    Date: 2014
  2. By: Jürgen Eichberger (Alfred Weber Institut, Heidelberg University.); Simon Grant (School of Economics, University of Queensland.); David Kelsey (Department of Economics, University of Exeter)
    Abstract: Raiffa (1961) has suggested that ambiguity aversion will cause a strict preference for randomization. We show that dynamic consistency implies that individuals will be indifferent to ex ante randomizations. On the other hand, it is possible for a dynamically-consistent ambiguity averse preference relation to exhibit a strict preference for some ex post randomizations. We argue that our analysis throws some light on the recent debate about paradoxes for the smooth model of ambiguity. We show that these rest on whether the randomizations implicit in the set-up are viewed as being resolved before or after the (ambiguous) uncertainty.
    Keywords: ambiguity, ex ante and ex post randomization, dynamic consistency, smooth ambiguity.
    JEL: D81
    Date: 2014
  3. By: Blanco, Mariana; Engelmann, Dirk; Koch, Alexander K.; Normann, Hans-Theo
    Abstract: In empirical analyses of games, preferences and beliefs are typically treated as independent. However, if beliefs and preferences interact, this may have implications for the interpretation of observed behavior. Our sequential social dilemma experiment allows us to separate different interaction channels. When subjects play both roles in such experiments, a positive correlation between first- and second-mover behavior is frequently reported. We find that the observed correlation primarily originates via an indirect channel, where second-mover decisions influence beliefs through a consensus effect, and the first-mover decision is a best response to these beliefs. Specifically, beliefs about second-mover cooperation are biased toward own second-mover behavior, and most subjects best respond to stated beliefs. However, we also find evidence for a direct, preference-based channel. When first movers know the true probability of second-mover cooperation, subjects' own second moves still have predictive power regarding their first moves. --
    Keywords: Beliefs,consensus effect,social dilemma,experimental economics
    JEL: C72 C90
    Date: 2014
  4. By: Berleman, Michael (Helmut Schmidt University, Hamburg); Enkelmann, Sören (Leuphana University Lüneburg)
    Abstract: Are preferences exogenously given? Or do individual tastes and values evolve endogenously within a particular socio-economic environment? In this paper, we make use of a natural experiment to analyse the role of inflation experiences and institutions in the formation of individual inflation preferences. In particular, we exploit the division of post-war Germany to investigate to what extent the factual non-experience of inflation and 40 years of Communism have affected inflation preferences in East and West Germany. We find that historical experiences have a significant and long-lasting effect on people's preferences. Due to their specific political and economic background, East Germans are significantly more inflation averse than West Germans, even 20 years after reunification.
    Keywords: endogenous preferences; inflation aversion; natural experiment; Germany
    JEL: E02 E31 P22
    Date: 2014–05–15
  5. By: Meinhardt, Holger Ingmar
    Abstract: Based on results given in the recent book by Meinhardt (2013), which presents a dual characterization of the pre-kernel by a finite union of solution sets of a family of quadratic and convex objective functions, we could derive some results related to the uniqueness of the pre-kernel. Rather than extending the knowledge of game classes for which the pre-kernel consists of a single point, we apply a different approach. We select a game from an arbitrary game class with an unique pre-kernel satisfying the non-empty interior condition of a payoff equivalence class, and then establish that the set of related and linear independent games which are derived from this pre-kernel of the default game replicate this point also as its sole pre-kernel element. In the proof we apply results and techniques employed in the above work. Namely, we prove in a first step that the linear mapping of a pre-kernel element into a specific vector subspace of balanced excesses is unique. Secondly, that there cannot exist a different and non-transversal vector subspace of balanced excesses in which a linear transformation of a pre-kernel element can be mapped. Furthermore, we establish that on the restricted subset on the game space that is constituted by the convex hull of the default and the set of related games, the pre-kernel correspondence is single-valued, and therefore continuous. Finally, we provide sufficient conditions that preserves the pre-nucleolus property for related games even when the default game has not an unique pre-kernel.
    Keywords: Transferable Utility Game; Pre-Kernel; Uniqueness; Convex Analysis; Fenchel-Moreau Conjugation; Indirect Function
    JEL: C71 D63 D74
    Date: 2014–05–19
  6. By: John T. Revesz (Australian Public Service)
    Abstract: This report examines the structure of optimal commodity tax rates in a many-person many-goods static computational model using segmented LES utility. One of the major findings is that with non-linear Engel curves and linear income tax, optimal commodity tax rates tend to be progressive and highly dispersed under logarithmic utility specifications. However, the dispersion of tax rates is considerably reduced if the inequality aversion of society is low or if tax evasion depends among other things on disparities between commodity tax rates. With exogenously given non-optimal and non-linear income tax schedules, usually there is still a need for differentiated and progressive commodity taxation. Tax evasion tends to reduce optimal tax rates for necessities but increases them for luxuries. Private compliance costs and government administration costs reduce optimal tax rates by a similar amount to the share of these costs from taxes. The results indicate that in a redistributive model the effect of externalities on optimal tax rates exceeds the corresponding Pigovian tax rates or subsidies. The main benefit of higher taxes on leisure complements than leisure substitutes appears to relate to increased tax revenue for redistribution rather than improvement in the utility position of those paying the taxes. The effect of complexities such as tax evasion, administrative costs, externalities and leisure complements/substitutes on redistribution is not neutral. Generally, these complexities tend to increase the progressivity of optimal commodity tax rates. Explanations are provided why the numerical results presented here do not contradict the Laroque-Kaplow proposition, which advocates uniform commodity taxation. Some practical application problems and logical weaknesses of the Laroque-Kaplow proposition are noted.
    Keywords: optimal taxation, computational models
    JEL: C63 H21
    Date: 2014–05

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