nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2014‒08‒16
nine papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Risk Preferences may be Time Preferences: A Comment on Andreoni and Sprenger (2012) By Ulrich Schmidt
  2. Stochastic dominance, risk and disappointment: a synthesis By Thierry Chauveau
  3. Multiple Interior Steady States in the Ramsey Model with Elastic Labor Supply By Takashi Kamihigashi
  4. Are teams less inequality averse than individuals ? By Haoran He; Marie Claire Villeval
  5. A Field Study of Chinese Migrant Workers’ Attitudes toward Risks, Strategic Uncertainty, and Competitiveness By Li Hao; Daniel Houser; Lei Mao; Marie Claire Villeval
  6. Structural Labor Supply Models and Wage Exogeneity By Loeffler, Max; Peichl, Andreas; Siegloch, Sebastian
  7. Influence Vs. Utility in the Evaluation of Voting Rules: A New Look at the Penrose Formula By Le Breton, Michel; Van Der Straeten, Karine
  8. University choice: the role of expected earnings, non-pecuniary outcomes, and financial constraints By Delavande, Adeline; Zafar, Basit
  9. A Case of Framing Effects: The Elicitation of Time Preferences By Paola Manzini; Marco Mariotti

  1. By: Ulrich Schmidt
    Abstract: In an intensively discussed paper, Andreoni and Sprenger (2012) , henceforth A&S, present an experiment where subjects can allocate money between two different points of time under the condition of risk. A&S claim that their results refute discounted expected utility (DEU) as well as prospect theory and other models relying on probability weighting. In this note I will show that the theoretical analysis of A&S is inappropriate and, therefore, that their claims are not valid. It turns out that the experimental results of A&S are fully in line with DEU. The main problem of A&S ´s analysis is that is confounds income with consumption. There exist several other comments on A&S (Miao andZhong, 2012; Epper and Fehr-Duda, 2014 and Cheung, 2014) which discuss interesting aspects of the analysis of A&S but have not identified the theoretical implications of equalizing consumption and income
    Keywords: Time Preferences
    JEL: C91 D81 D91
    Date: 2014–07
  2. By: Thierry Chauveau (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)
    Abstract: Although it is endowed with many interesting properties, the theory of decision-making under risk by Loomes and Sugden [1986] has never been given an axiomatics. In this paper, we make up for this omission because their lottery-dependent functional is endowed with many interesting properties to which little attention has been paid up to now. In particular, investors whose preferences are represented by the functional are rational in that (a) they actually behave differently if they are risk averse or risk prone, (b) risk is defined in a consistent way with risk aversion, (c) the functional is but the opposite to a convex measure of risk (Föllmer ans Schied [2002]) when constant marginal utility is assumed and (d) violations of the second-order stochastic dominance property are allowed for when "utils" are substituted for monetary values. Moreover, the partial weak order induced by stochastic dominance over utils is as "close" to the weak order of preferences as possible and utility functions may be elicited through experimental testing.
    Keywords: Disappointment; risk-aversion; expected utility; risk premium; stochastic dominance; subjective risk
    Date: 2014–06
  3. By: Takashi Kamihigashi (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)
    Abstract: In this paper we show that multiple interior steady states are possible in the Ramsey model with elastic labor supply. In particular we establish the following three results: (i) for any discount factor and production function, there is a utility function such that a continuum of interior steady states exist; (ii) the number of interior steady states can also be any finite number; and (iii) for any discount factor and production function, there is a utility function such that there is no interior steady state. Some numerical examples are provided.
    Keywords: Multiple steady states, Ramsey model, Elastic labor supply, Neoclassical growth
    JEL: C61 C62 E13 O41
    Date: 2014–07
  4. By: Haoran He (School of Economics and Business Administration, Beijing Normal University, 19, XinJieKouWai Street, HaiDian District, Beijing 100875, P. R. China); Marie Claire Villeval (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)
    Abstract: We compare inequality aversion in individuals and teams by means of both within- and between-subject experimental designs, and we investigate how teams aggregate individual preferences. We find that team decisions reveal less inequality aversion than individual initial proposals in team decision-making. However, teams are no more selfish than individuals who decide in isolation. Individuals express strategically more inequality aversion in their initial proposals in team decision-making because they anticipate the selfishness of other members. Members with median social preferences drive team decisions. Finally, we show that social image has little influence because guilt and envy are almost similar in anonymous and non-anonymous interactions.
    Keywords: Team, inequity aversion, preference aggregation, social image, experiment
    JEL: C91 C92 D03 D63 D72
    Date: 2014
  5. By: Li Hao (Sam M. Walton College of Business, University of Arkansas, Fayetteville, AR 72701, USA); Daniel Houser (George Mason University, 4400 University Drive, MSN 1B2, Fairfax, VA 22030 USA); Lei Mao (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France); Marie Claire Villeval (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)
    Abstract: Using a field experiment in China, we study whether migration status is correlated with attitudes toward risk, ambiguity, and competitiveness. Our subjects include migrants and non-migrants. We find that, migrants exhibit no differences from non-migrants in risk and ambiguity preferences elicited using pairs of lotteries ; however, migrants are significantly more likely to enter competition in the presence of strategic uncertainty when they expect competitive entries from others. Our results suggest that migration may be driven more by a stronger belief in one’s ability to succeed in an uncertain and competitive environment than by risk attitudes under state uncertainty.
    Keywords: Migration, risk preferences, strategic uncertainty, ambiguity, field experiment
    JEL: C93 D03 D63 J61
    Date: 2014
  6. By: Loeffler, Max (ZEW Mannheim); Peichl, Andreas (ZEW Mannheim); Siegloch, Sebastian (University of Mannheim)
    Abstract: There is still considerable dispute about the magnitude of labor supply elasticities. While differences in micro and macro estimates are recently attributed to frictions and adjustment costs, we show that relatively low labor supply elasticities derived from microeconometric models can also be explained by modeling assumptions with respect to wages. Specifically, we estimate 3,456 structural labor supply models each representing a plausible combination of frequently made choices. While most model assumptions do not systematically affect labor supply elasticities, our analysis shows that the results are very sensitive to the treatment of wages. In particular, the often-made but highly restrictive independence assumption between preferences and wages is key. To overcome this restriction, we propose a flexible estimation strategy that nests commonly used models. We show that loosening the exogeneity assumption leads to labor supply elasticities that are much higher.
    Keywords: labor supply, elasticity, random utility models, wages
    JEL: C25 C52 H31 J22
    Date: 2014–06
  7. By: Le Breton, Michel; Van Der Straeten, Karine
    Abstract: In this paper, we clarify the relationship between influence/power measurement and utility measurement, the most popular two social objective criteria used when evaluating voting mechanisms. For one particular probabilistic model describing the preferences of the electorate, the so-called Impartial Culture (IC) model used by Banzhaf, the Penrose formula show that the two objectives coincide. The IC probabilistic model assumes that voter preferences are independent. In this article, we prove a general version of the Penrose formula, allowing for correlations in the electorate. We show that in that case, the two social objectives no longer coincide, and qualitative conclusions can be very different.
    Keywords: Power measurement, Voting, Random electorates
    JEL: D71 D72
    Date: 2014–07
  8. By: Delavande, Adeline; Zafar, Basit (Federal Reserve Bank of New York)
    Abstract: We investigate the determinants of students’ university choice, with a focus on expected monetary returns, non-pecuniary factors enjoyed at school, and financial constraints, in the Pakistani context. To mitigate the identification problem concerning the separation of preferences, expectations, and markets constraints, we combine rich data on individual-specific subjective expectations about labor market and non-pecuniary outcomes, with direct measures of financial constraints and students’ stated school choice both with and without financial constraints. Estimates from a life-cycle model show that future earnings play a small (but statistically significant) role. However, non-pecuniary features, such as a school’s ideology, are major determinants. Data on students’ choices without financial constraints allow for the out-of-sample validation of the model, which shows a strikingly good fit. Our results demonstrate that 37 percent of students are financially constrained in their choice of university, and that implementing policies relaxing financial constraints would increase students’ average lifetime subjective expected utility by 21 percent. From a methodological standpoint, we find that ignoring non-pecuniary factors, uncertainty related to employment and drop-out, or direct measures of financial constraints yields biased estimates—a result that underscores the importance of having data on these elements for understanding university choice in any context.
    Keywords: school choice; credit constraints; subjective expectations
    JEL: D81 D84 I21 I23
    Date: 2014–08–01
  9. By: Paola Manzini (University of St Andrews and IZA); Marco Mariotti (University of St Andrews)
    Abstract: We compare three methods for the elicitation of time preferences in an experimental setting: the Becker-DeGroot-Marschak procedure (BDM); the second price auction; and the multiple price list format. The first two methods have been used rarely to elicit time preferences. All methods used are perfectly equivalent from a decision theoretic point of view, and they should induce the same `truthful' revelation i dominant strategies. In spite of this, we find that framing does matter: the money discount rates elicited with the multiple price list tend to be higher than those elicited with the other two methods. In addition, our results shed some light on attitudes towards time, and they permit a broad classification of subjects depending on how the size of the elicited values varies with the time horizon
    Keywords: time preferences, elicitation methods, BDM, Auctions, MPL
    JEL: C91 D9
    Date: 2014–07–21

This nep-upt issue is ©2014 by Alexander Harin. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.