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on Utility Models and Prospect Theory |
| By: | Zahra Murad (School of Economics, University of Nottingham; Department of Health Care Management and Policy, University of Surrey); Chris Starmer (Department of Economics, University of Amsterdam); Martin Sefton (School of Economics, University of Nottingham) |
| Abstract: | We examine the relationship between confidence in own absolute performance and risk attitudes using two elicitation procedures: self-reported (non-incentivised) confidence and an incentivised procedure that elicits the certainty equivalent of a bet based on performance. The former procedure reproduces the “hard-easy effect†(overconfidence in easy tasks and underconfidence in hard tasks) found in a large number of studies using non-incentivised self-reports. The latter procedure produces general underconfidence, which is significantly reduced, but not eliminated when we filter out the effects of risk attitudes. Finally, we find that self-reported confidence correlates significantly with features of individual risk attitudes including parameters of individual probability weighting. |
| Keywords: | Overconfidence, Underconfidence, Experiment, Risk Preferences |
| URL: | http://d.repec.org/n?u=RePEc:not:notcdx:2014-18&r=upt |
| By: | Catia Batista; Dan Silverman; Dean Yang |
| Abstract: | We investigate the determinants of giving in a lab-in-the-field experiment with large stakes. Study participants in urban Mozambique play dictator games where their counterpart is the closest person to them outside their household. Dictators share more with counterparts when they have the option of giving in kind (in the form of goods), compared to giving that must be in cash. Qualitative post-experiment responses suggest that this effect is driven by a desire to control how recipients use gifted resources. Standard economic determinants such as the rate of return to giving and the size of the endowment also affect giving, but the effects of even large changes in these determinants are significantly smaller than the effect of the in-kind option. Our results support theories of giving where the utility of givers depends on the composition (not just the level) of gift-recipient expenditures, and givers thus seek control over transferred resources. JEL codes: C92, C93, D01, D03, D64, O17 |
| Keywords: | sharing, altruism, giving, dictator game, inter-household transfers, Mozambique |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:unl:unlfep:novafrica:wp1302&r=upt |
| By: | Chaigneau, Pierre; Edmans, Alex; Gottlieb, Daniel |
| Abstract: | This paper shows that the informativeness principle, as originally formulated by Holmstrom (1979), does not hold if the first-order approach is invalid. We introduce a "generalized informativeness principle" that takes into account non-local incentive constraints and holds generically, even without the first-order approach. Our result holds for both separable and non-separable utility functions. |
| Keywords: | Contract theory; informativeness principle.; principal-agent model |
| JEL: | D86 J33 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10279&r=upt |
| By: | de Roode, F.A. (Tilburg University, School of Economics and Management) |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiutis:c425daf8-c7a3-4ea4-8b18-370df0e8b21a&r=upt |
| By: | Mikolaj Czajkowski (University of Warsaw, Faculty of Economic Sciences, Warsaw Ecological Economics Center, Poland); Anna Barczak (University of Warsaw, Faculty of Economic Sciences, Warsaw Ecological Economics Center, Poland); Wiktor Budzinski (University of Warsaw, Faculty of Economic Sciences, Warsaw Ecological Economics Center, Poland); Marek Giergiczny (University of Warsaw, Faculty of Economic Sciences, Warsaw Ecological Economics Center, Poland); Nick Hanley (School of Geography and Sustainable Development, University of St. Andrews) |
| Abstract: | The assumption of the stability of preferences is a fundamental one in the theory of the consumer. Many papers within the stated preferences literature have tested this assumption, and have found mixed results. Individuals may become more sure of their preferences as they repeat a valuation task or purchase decision; they may also learn more about prices and quantities of substitutes or complements over time, or about other relevant characteristics of both the good being valued and alternatives in their choice sets. In this paper, we test for the stability of preferences and willingness to pay for attributes of forest management both within and between samples. The within-sample test compares a set of responses from individuals over the sequence of a survey; the between-sample test compares responses from the same people over a period of 6 months. We find that respondents’ preferences differ more within a sample (comparing their first 12 with their second 12 choices) than across samples. This may imply that preference learning and/or fatigue effects within choice experiments are more important than changes in preferences over time in this data. |
| Keywords: | preference stability, test-retest, discrete choice experiments, contingent valuation, stated preferences, forestry |
| JEL: | D01 H4 Q23 Q51 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:sss:wpaper:2014-06&r=upt |
| By: | Naoki Sakamoto; Kazunori Nakajima |
| Abstract: | This paper proposes the consistent method with general equilibrium models to measure use value and non-use value of large-scale change in environmental quality. First, we develop a general equilibrium model that parameters of the utility function with environmental quality as a dependent variable can be estimated on the basis of the travel cost method and the contingent variation method. Second, we examine to identify the general equilibrium impact of environmental quality by a comparative static analysis. Third, considering change in prices and income, we decompose the benefits from change in environmental quality into use value and non-use value. JEL Classifications: C68, Q51, Q54 Keywords: Computable general equilibrium models;Use value; Non-use value |
| JEL: | C68 Q51 Q54 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa14p1105&r=upt |
| By: | Steffen Andersen; Alec Brandon; Uri Gneezy; John A. List |
| Abstract: | Perhaps the most powerful form of framing arises through reference dependence, wherein choices are made recognizing the starting point or a goal. In labor economics, for example, a form of reference dependence, income targeting, has been argued to represent a serious challenge to traditional economic models. We design a field experiment linked tightly to three popular economic models of labor supply—two behavioral variants and one simple neoclassical model—to deepen our understanding of the positive implications of our major theories. Consistent with neoclassical theory and reference-dependent preferences with endogenous reference points, workers (vendors in open air markets) supply more hours when presented with an expected transitory increase in hourly wages. In contrast with the prediction of behavioral models, however, when vendors earn an unexpected windfall early in the day, their labor supply does not respond. A key feature of our market in terms of parsing the theories is that vendors do not post prices rather they haggle with customers. In this way, our data also speak to the possibility of reference-dependent preferences over other dimensions. Our investigation again yields results that are in line with neoclassical theory, as bargaining patterns are unaffected by the unexpected windfall. |
| JEL: | C93 D01 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20695&r=upt |
| By: | Tim Bollerslev (Duke University, NBER and CREATES); Viktor Todorov (Northwestern University and CREATES); Lai Xu (Duke University) |
| Abstract: | The variance risk premium, defined as the difference between actual and risk-neutralized expectations of the forward aggregate market variation, helps predict future market returns. Relying on new essentially model-free estimation procedure, we show that much of this predictability may be attributed to time variation in the shape of the tails and compensation demanded by investors for bearing jump tail risk. Our results are consistent with the idea that the temporal variation in the separate diffusive and jump risk components of the variance risk premium may be associated with notions of time-varying economic uncertainty and changes in risk aversion, or market fears, respectively. |
| Keywords: | Variance risk premium, time-varying jump tails, market sentiment and fears, return predictability. |
| JEL: | C13 C14 G10 G12 |
| Date: | 2014–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2014-49&r=upt |
| By: | Spiegler, Ran |
| 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. |
| Keywords: | Bayesian networks; boundedly rational expectations; coarse reasoning; directed acyclic graphs; misspecified models; personal equilibrium; reverse causality |
| JEL: | D03 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10062&r=upt |
| By: | Arthur Grimes; Eyal Apatov; Larissa Lutchmann; Anna Robinson |
| Abstract: | We analyse the impacts that infrastructure provision has on long run urban development. The topic is of major importance to policy-makers when deciding whether or not to invest in major infrastructure projects. The analysis helps policy-makers to understand the intended, and potentially unintended, long run consequences of their infrastructure investment decisions. Reflecting a spatial equilibrium approach, we maintain that population flows reflect people's overall rankings of urban areas; thus, through revealed preference, growing cities are shown to have had preferred attributes (wages and amenities combined) relative to other cities. Social infrastructure (such as higher educational institutions and hospitals) and transport infrastructure may have both productive and amenity value. Thus increased provision of such infrastructure within a city may enhance a city's attractiveness provided their benefits exceed costs of provision. Poor infrastructure provision linking an urban area to major cities and other amenities may, conversely, reduce the attractiveness of that urban area, curtailing its long run population growth. We first outline a new theoretical model that includes distance-related effects on individual utility, and hence on urban population development. The new derivation, while similar to that of a recent model by Duranton and Turner (Review of Economic Studies, 2012), avoids a convenient but questionable assumption in their approach in relation to the effect of distance on individual utility. Our theoretical approach includes the impact of amenities, and the effect of distance in reducing their attractiveness, while also accounting for potential distance-related effects on wages and living costs. We test our model using long-term (80 year) historical data (measured every 10 years from 1926 to 2006) that enables us to relate the populations of 60 New Zealand urban areas to early infrastructure provision and initial conditions (e.g. existence of a harbour, topography, climate, etc). The use of additional data from the start of the twentieth century as instruments enables us to test whether early (and subsequent) infrastructure provision affected the shape of city development over the 80 year period. As well as dealing with endogeneity issues through our choice of instruments, we use spatial-econometrics techniques to test for spatial spillovers between cities. |
| Keywords: | Infrastructure; city development; population growth; migration; spatial equilibrium |
| JEL: | H54 R12 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa14p178&r=upt |
| By: | Massimiliano Landi (Singapore Management University) |
| Abstract: | I provide a simple example of a quadratic utility function that generates a Giffen demand. The utility function is symmetric, increasing and concave. Interestingly, the Giffen effect arises in the subspace where the utility function is strictly increasing and strictly concave. A full characterization of the parameter conditions under which the Giffen demand arises is provided. |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:siu:wpaper:21-2014&r=upt |
| By: | David Greasley (School of History, Classics and Archaeology, University of Edinburgh); Nick Hanley (School of Geography and Sustainable Development, University of St. Andrews); Eoin McLaughlin (School of Geography and Sustainable Development, University of St. Andrews); Les Oxley (Department of Economics, University of Waikato) |
| Abstract: | Modern macroeconomic theory utilises optimal control techniques to model the maximisation of individual well-being using a lifetime utility function. Agents face choices over current and future consumption (with resultant implied savings decisions) seeking to maximise the present value of current plus future well-being. However, such inter-temporal welfare- maximising assumptions remain empirically untested. In the work presented here we test whether welfare was in (historical) fact maximised in the US between 1870 -2000 and find empirical support for the optimising basis of growth theory, but only once a comprehensive view of what constitutes a country’s wealth or capital is taken into account. |
| Keywords: | inter-temporal utility maximisation;modern growth theory; US; comprehensive wealth |
| JEL: | E21 E22 C61 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:sss:wpaper:2014-01&r=upt |