nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2014‒12‒19
fourteen papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Stochastic dominance, risk and disappointment: a synthesis By Thierry Chauveau
  2. Fitting parsimonious household- portfolio models to data By Hubar, Sylwia; Koulovatianos, Christos; Li, Jian
  3. Memory and Anticipation: New Empirical Support for an Old Theory of the Utility Function By John Knight; Ramani Gunatilaka
  4. Credence goods, experts and risk aversion By Olivier Bonroy; Stéphane Lemarié; Jean-Philippe Tropeano
  5. Cooperatives and the Risk Aversion of Farmers By Olimov, Jafar
  6. Do Farm Lenders’ Attitudes and Risk Assessment Models Encourage Organic Farms’ Debt Aversion? By Jones, Ghangela L.; Rusiana, Hofner D.; Escalante, Cesar L.
  7. Enjoyment takes time: Some implications for choice theory By Nisticò, Sergio
  8. Bernanke/Blinder revisited - The New Keynesian model with credit channel By Offick, Sven; Wohltmann, Hans-Werner
  10. The Role of Risk and Risk-Aversion in Adoption of Alternative Marketing Arrangements by the U.S. Farmers By Hu, Wu-Yueh; Vukina, Tomislav; Zheng, Viaoyong
  11. Accounting for Context: Separating Monetary and Social Incentives By Andreas Bergh; Philipp C. Wichardt
  12. Cash holdings and financing decisions under ambiguity By E. Agliardi; R. Agliardi; W. Spanjers
  13. Understanding Uncertainty Shocks and the Role of Black Swans By Anna Orlik; Laura Veldkamp
  14. An Empirical Analysis of Residential Energy Efficiency Adoption by Housing Types and Occupancy By Hellman Miller, Kelly; Colantuoni, Francesca; Lasco Crago, Christine

  1. 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
  2. By: Hubar, Sylwia; Koulovatianos, Christos; Li, Jian
    Abstract: US data and new stockholding data from fifteen European countries and China exhibit a common pattern: stockholding shares increase in household income and wealth. Yet, there is a multitude of numbers to match through models. Using a single utility function across households (parsimony), we suggest a strategy for fitting stockholding numbers, while replicating that saving rates increase in wealth, too. The key is introducing subsistence consumption to an Epstein-Zin-Weil utility function, creating endogenous risk-aversion differences across rich and poor. A closed-form solution for the model with insurable labor-income risk serves as calibration guide for numerical simulations with uninsurable labor-income risk.
    Keywords: Epstein-Zin-Weil recursive preferences,subsistence consumption,household-portfolio shares,business equity,wealth inequality
    JEL: G11 D91 D81 D14 D11 E21
    Date: 2014
  3. By: John Knight; Ramani Gunatilaka
    Abstract: The paper contrasts early theories of the utility function (starting with Bentham and elaborated by Jevons) with the modern theory (laid down by Fisher and Samuelson).  The former include in the utility function not only the sensation of current events but also the memory of past events and the anticipation of future events.  The alternative hypotheses are tested by introducing both past and expected future income into the estimated subjective well-being function, using an appropriate data set for China.  The tests favour the early theories.  Implications are drawn.
    Keywords: Anticipation, China, Discounted utility, Memory, Subjective well-being, Utility function
    JEL: B13 B21 D60
    Date: 2014–08–28
  4. By: Olivier Bonroy (GAEL - Laboratoire d'Economie Appliquée de Grenoble - Institut national de la recherche agronomique (INRA) : UMR1215 - Université Grenoble Alpes - Grenoble II); Stéphane Lemarié (GAEL - Laboratoire d'Economie Appliquée de Grenoble - Institut national de la recherche agronomique (INRA) : UMR1215 - Université Grenoble Alpes - Grenoble II); Jean-Philippe Tropeano (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: The existing literature on credence goods and expert services has overlooked the importance of risk aversion. In this paper we extend a standard expert model of credence goods with verifiable service quality by considering risk-averse consumers. Our results show that the presence of risk aversion reduces the expert's incentive to invest in diagnosis and may thus lead to consumers' mistreatment.
    Keywords: Credence goods; Expert services; Risk aversion
    Date: 2013–09
  5. By: Olimov, Jafar
    Keywords: Agribusiness, Industrial Organization, Risk and Uncertainty,
    Date: 2014
  6. By: Jones, Ghangela L.; Rusiana, Hofner D.; Escalante, Cesar L.
    Keywords: organic farming, risk assessment model, probit, backward stepwise regression, Agricultural Finance, Financial Economics, Institutional and Behavioral Economics, Risk and Uncertainty,
    Date: 2014
  7. By: Nisticò, Sergio
    Abstract: The paper suggests that casting the choice problem in terms of alternative time-consuming activities can foster the fruitful cross-fertilization between economics and psychology along the lines suggested by Scitovsky in the Joyless Economy. The first part emphasizes how mainstream, utility-based choice theory has eradicated "time" from the analysis, in contrast with the seminal contribution to the subjective theory of value proposed by Gossen in 1858. The limits of Becker's well-known approach to time-use are also analyzed. The second part opens with the presentation of an alternative approach based on activities, intended as productive processes allowing for pleasant time to be produced by consuming "direct" unpleasant time plus the "indirect" amount of unpleasant time equivalent to the market goods used up as inputs. Finally, the approach is applied to an intertemporal context by drawing on Hicks's temporary equilibrium method. Scitovsky's distinction between defensive and creative activities is discussed in conclusion, suggesting that individuals might refrain from engaging in more skilled, time-consuming activities because of the attractiveness of a certain, higher present-period rate of return of less skilled, goods-intensive activities.
    Keywords: Time use,consumption Activities,behavior,choice
    JEL: B41 D03 D11 D81
    Date: 2014
  8. By: Offick, Sven; Wohltmann, Hans-Werner
    Abstract: This paper integrates a money and credit market into a static approximation of the baseline New Keynesian model based on a money-and-credit-in-the-utility approach, in which real balances and borrowing contribute to the household's utility. In this framework, the central bank has no direct control over the interest rate on bonds. Instead, the central bank's instrument variables are the monetary base and the refinancing rate, i.e. the rate at which the central bank provides loans to the banking sector. Our approach gives rise to a credit channel, in which current and expected future interest rates on the bond and loan market directly affect current goods demand. The credit channel amplifies the output effects of isolated monetary disturbances. Taking changes in private (inflation and interest rate) expectations into account, we find that - contrarily to Bernanke and Blinder (1988) - the credit channel may also dampen the output effects of monetary disturbances.
    Keywords: Money,Loan,Money-and-credit-in-the-utility,Credit channel,New Keynesian model,Monetary policy
    JEL: A20 E51 E52
    Date: 2014
  9. By: Kiyohiko G. Nishimura (The University of Tokyo); Hiroyuki Ozaki S (Keio University)
    Abstract: In this paper, we extend the concept of rational-expectations equilibrium, from a traditional single-belief framework to a multi-belief one. In the traditional framework of single belief, agents are supposed to know the equilibrium price “correctly.†We relax this requirement in the framework of multiple beliefs. While agents do not have to know the equilibrium price exactly, they must be correct in that it must be always contained in the support of each probability distribution they think possible. We call this equilibrium concept a multibelief rational-expectations equilibrium. We then show that such an equilibrium exists, that indeterminacy and complexity of equilibria can happen even when the degree of risk aversion is moderate and, in particular, that a decreasing price sequence can be an equilibrium. The last property is highlighted in a linear-utility example where any decreasing price sequence is a multi-belief rational-expectations equilibrium while only possible single-belief rational-expectations equilibrium price sequences are those which are constant over time.
    Date: 2014–08
  10. By: Hu, Wu-Yueh; Vukina, Tomislav; Zheng, Viaoyong
    Abstract: Abstract The objective of this paper is to analyze the relationship between farmers’ risk-aversions and the riskiness of various agricultural enterprises to see which marketing arrangements would typically emerge. Relying on the basic agency theory model we hypothesize the prevalence of alternative marketing arrangements (AMAs) in situations with high-risk averse farmers and high-risk enterprises and the prevalence of spot (cash) markets for low risk-averse participants and less risky enterprises. Our empirical tests are carried out using the 2004 Agricultural Resource Management Survey (ARMS). The empirical results are largely supportive of the agency theory of contract choice.
    Keywords: Agency theory, Risk, Contract choice., Agribusiness, Industrial Organization, Marketing, Risk and Uncertainty, Q12, Q13, L14,
    Date: 2014
  11. By: Andreas Bergh; Philipp C. Wichardt
    Abstract: This paper proposes a simple framework to model social preferences in a game theoretic framework which explicitly separates economic incentives from social (context) effects. It is argued that such a perspective makes it easier to analyse contextual effects. Moreover, the framework is used to exemplify both theoretically and empirically how contextual variables such as social norms can worsen a social dilemma or possibly make it disappear. The empirical results of a randomised controlled classroom experiment show that women are more responsive to such contextual effects and that social agreements can also worsen economic inefficiencies
    Keywords: Context Effects, Efficiency, Social Norms, Social Preferences, Utility
    JEL: D03 D63 Z10
    Date: 2014–11
  12. By: E. Agliardi; R. Agliardi; W. Spanjers
    Abstract: This paper addresses the following unresolved questions: Why do some firms issue equity instead of debt? Why did most firms retain their cash holdings instead of distributing them as dividends in recent times? How do firms change their financing policies during a period of severe financial constraints and ambiguity, or when facing the threat of an unpredictable financial crisis? We analyze how the values of the firm’s equity and debt are affected by ambiguity. We also show that cash holdings are retained longer if the investors’ ambiguity aversion bias is sufficiently large, while cash holdings become less attractive when the combined impact of ambiguity and ambiguity aversion is relatively low.
    JEL: G30 G32 D01 D81
    Date: 2014–11
  13. By: Anna Orlik; Laura Veldkamp
    Abstract: A fruitful emerging literature reveals that shocks to uncertainty can explain asset returns, business cycles and financial crises. The literature equates uncertainty shocks with changes in the variance of an innovation whose distribution is common knowledge. But how do such shocks arise? This paper argues that people do not know the true distribution of macroeconomic outcomes. Like Bayesian econometricians, they estimate a distribution. Using real-time GDP data, we measure uncertainty as the conditional standard deviation of GDP growth, which captures uncertainty about the distributions estimated parameters. When the forecasting model admits only normally-distributed outcomes, we find small, acyclical changes in uncertainty. But when agents can also estimate parameters that regulate skewness, uncertainty fluctuations become large and counter-cyclical. The reason is that small changes in estimated skewness whip around probabilities of unobserved tail events (black swans). The resulting forecasts resemble those of professional forecasters. Our uncertainty estimates reveal that revisions in parameter estimates, especially those that affect the risk of a black swan, explain most of the shocks to uncertainty.
    JEL: C53 E17 E44 G01 G14
    Date: 2014–08
  14. By: Hellman Miller, Kelly; Colantuoni, Francesca; Lasco Crago, Christine
    Abstract: Uncertainties about future levels of energy availability and concern for climate change have raised public interest in energy efficiency and conservation. In particular, efficiency gains in the residential sector, which accounts for about 22% of energy end-use in the United States has the potential to yield large benefits for society. In this research we conduct an empirical analysis to investigate the likelihood of adoption of energy efficiency (EE) measures in the residential sector. We consider heterogeneity of occupants and homeowners based on their demographic characteristics, as well as the structural characteristics of housing units, weather parameters and geographical characteristics. Our empirical results shed light on (1) the drivers of EE adoption for households, (2) the extent to which EE adoption differs between homeowners and landlords, and (3) the extent to which EE adoption differs among types of housing (utility-included vs. utility-excluded rent, owner occupied).
    Keywords: Energy efficiency, Environmental Economics and Policy, Resource /Energy Economics and Policy,
    Date: 2014

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