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on Utility Models and Prospect Theory |
| By: | Efthymios G. Tsionas (Athens University of Economics and Business) |
| Abstract: | The paper develops new indices of financial stability based on an explicit model of expected utility maximization by financial institutions subject to the classical technology restrictions of neoclassical production theory. The model can be estimated using standard econometric techniques, like GMM for dynamic panel data and latent factor analysis for the estimation of covariance matrices. An explicit functional form for the utility function is not needed and we show how measures of risk aversion and prudence (downside risk aversion) can be derived and estimated from the model. The model is estimated using data for Eurozone countries and we focus particularly on (i) the use of the modeling approach as an “early warning mechanism”, (ii) the bank- and country-specific estimates of risk aversion and prudence (downside risk aversion), and (iii) the derivation of a generalized measure of risk that relies on loan-price uncertainty. |
| Keywords: | Financial Stability; Banking; Expected Utility Maximization; Sub-prime crisis; Financial Crisis; Eurozone; PIIGS. |
| JEL: | G20 G21 C51 C54 D21 D22 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:183&r=upt |
| By: | Brad R. Humphreys (West Virginia University, College of Business and Economics); Li Zhou (University of Alberta) |
| Abstract: | Professional sports teams receive large public subsidies for new facility construction. Empirical research suggests that these subsidies cannot be justified by tangible or intangible economic benefits. We develop a model of bargaining between local governments and teams over subsidies that includes league expansion decisions. The model features loss aversion by fans that captures lost utility when a team leaves a city. The model predicts that teams exploit this loss aversion to extract larger than expected subsidies from local governments, providing an explanation for these large subsidies and highlighting the importance of anti-trust exemptions in enhancing teams' bargaining positions. |
| Keywords: | Endowment Effect, Loss aversion, major league sports, bargaining |
| JEL: | D42 H25 L12 L83 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:wvu:wpaper:14-17&r=upt |
| By: | Iwata, Shinichiro; Naoi, Michio |
| Abstract: | The existing literature has shown that increases in housing wealth, driven by unexpected house price shocks, have a positive effect on birth rates of homeowners. According the canonical model, a decrease in housing wealth has a symmetric negative impact on fertility behavior of households. That is, housing gains and losses of the same size should have identical quantitative effects (in an absolute sense) on fertility. In comparison, the theory of reference-dependent preferences suggests that people care more about housing losses than about equivalent gains, leading to an asymmetric housing wealth effect on a fertility decision. In our model, a utility from having a baby is weighted by a utility from house price where reference levels based on the house price at the time of purchase. The theoretical model suggests that the probability of giving birth is kinked at a reference housing wealth level and the wealth effects are discontinuously larger below the kink than above the kink. This theoretical prediction is tested using the recent survey data of Japanese households (Keio Household Panel Survey, KHPS). The KHPS is a nationally-representative, large-scale panel data started in 2004 with initial sample of approximately 4,000 households. Our empirical results suggest that, consistent with the theoretical prediction, homeowners' fertility responses are substantially larger when their housing wealth is below its reference level than when housing wealth is above reference level. Specifically, while estimated marginal effect is significantly positive when housing wealth is below its reference level, it is still positive but insignificant when housing wealth is above reference level. Furthermore, we also find that asymmetric wealth effects are robust to a number of alternative specifications, including controlling for possible measurement errors and unobserved heterogeneity of households. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:arz:wpaper:eres2013_299&r=upt |
| By: | Christian Chiglino (University of Essex); Nicole Tabasso (University of Surrey) |
| Abstract: | Despite the evidence on incomplete financial markets and substantial risk being borne by innovators, current models of growth through creative destruction predominantly model innovators as risk neutral. Risk aversion is expected to reduce the incentive to innovate and we might fear that without insurance innovation completely disappears in the long run. The present paper introduces risk averse agents into an occupational choice model of endogenous growth in which insurance against failure to innovate is not available. We derive a clear negative relationship between the level of risk aversion and long run growth. Surprisingly, we show that in an equilibrium there exists a cut-off value of risk aversion below which the growth rate of the mass of innovators tends to a strictly positive constant. In this case, innovation persists on the long run and consumption per capita grows at a strictly positive rate. On the other hand, for levels of risk aversion above the cut-off of value, the economy eventually stagnates. |
| JEL: | O40 O41 O43 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0314&r=upt |
| By: | YiLi Chien; Harold L. Cole; Hanno Lustig |
| Abstract: | This paper extends the methodology developed in Chien, Cole and Lustig (2011 & 2012) (hereafter CCL2011 and CCL2012, respectively) to analyze and compute the equilibria of economies with heterogeneous agents who have different asset trading technologies and are subject to both aggregate and idiosyncratic income risk. The different asset trading technologies, which are designed to replicate the portfolio behavior seen in the data, fall into two classes. Active traders manage the composition of their portfolios among a given set of assets in addition to choosing how much to save. Passive traders take their portfolio composition as given and choose only how much to save. There can be a wide variety of different cases within each classes. For active traders, the trading technology varies depending on the set of assets that they can use, while for passive traders it varies with the specific portfolio composition rule. In CCL2011 and CCL2012, all of our agents had to have the same CRRA flow utility functions, discount rates, and beliefs. In this extension, this restriction is relaxed greatly extending the set of economies to which our method applies. This richer degree of heterogeneity allows the model to match a number of key features of the data. |
| JEL: | E21 E44 G11 G12 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20328&r=upt |
| By: | Ran Spiegler (Tel Aviv University, Eitan Berglas School of Economics; Centre for Macroeconomics (CFM)) |
| Abstract: | I present a framework for analyzing decision makers with an imperfect understanding of their environment’s correlation structure. The decision maker faces an objective multivariate probability distribution (his own action is one of the random variables). He is characterized by a directed acyclic graph over the set of variables. His subjective belief filters the objective distribution through his graph, via the factorization formula for Bayesian networks. This belief distortion implies that the decision maker’s long-run behavior may affect his perception of the consequences of his actions. Accordingly, I define a "personal equilibrium" notion of optimal choices. I show how recent models of boundedly rational expectations (as well as new ones, e.g. reverse causality) can be subsumed into this framework as special cases. Some general properties of the Bayesian-network representation of subjective beliefs are presented, as well as a "missing data" foundation. |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1417&r=upt |