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on Utility Models and Prospect Theory |
| By: | Harin, Alexander |
| Abstract: | A possibility of the existence of a discontinuity of Prelec’s (probability weighting) function W(p) at the probability p = 1 is discussed. This possibility is supported by the Aczél–Luce question whether Prelec’s weighting function W(p) is equal to 1 at p = 1, by the purely mathematical restrictions and the “certain–uncertain” inconsistency of the random–lottery incentive experiments. The results of the well-known experiments support this possibility as well. |
| Keywords: | utility; prospect theory; certainty effect; experiment; Prelec; probability weighting function; |
| JEL: | C1 C9 C91 D8 D81 |
| Date: | 2014–12–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:61027&r=upt |
| By: | Harin, Alexander |
| Abstract: | A need for experiments on the certainty effect near the certainty (near the probability p = 1) is stated in this paper. The need supported by the Aczél–Luce question whether Prelec’s weighting function W(p) is equal to 1 at p = 1, by the purely mathematical restrictions and the “certain–uncertain” inconsistency of the random–lottery incentive experiments. The results of the experiments of the certainty effect near the certainty show that Prelec’s (probability) weighting function can be discontinuous at the probability p = 1. There is a need for new experiments at probabilities which are closer to p=1, e.g., at probabilities p=.99 and p=.999. |
| Keywords: | utility; prospect theory; certainty effect; experiment; Prelec; probability weighting function; |
| JEL: | C1 C9 C91 D8 D81 |
| Date: | 2014–12–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:61026&r=upt |
| By: | Yuzhe Zhang (Texas A&M University); Jianjun Miao (Boston University) |
| Abstract: | We propose a duality approach to solving contracting models with either one-sided or two-sided limited commitment in continuous time. We establish weak and strong duality theorems and provide a dynamic programming characterization of the dual problem. The dual problem gives a linear Hamilton-Jacobi-Bellman equation with a known state space subject to free-boundary conditions, making analysis much more tractable than the primal problem. We provide two explicitly solved examples of a consumption insurance problem. We characterize the optimal consumption allocation in terms of the marginal utility ratio. We find that neither autarky nor full risk sharing can be an optimal contract with two-sided limited commitment, unlike in discrete-time models. We also derive an explicit solution for the unique long-run stationary distribution of consumption relative to income. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:650&r=upt |
| By: | Jan Heufer; Per Hjertstrand |
| Abstract: | We provide two methods to compute the largest subset of a set of observations that is consistent with the Generalised Axiom of Revealed Preference. The algorithm provided by Houtman and Maks (1985) is not comput ationally feasible for larger data sets, while our methods are not limited in that respect. The first method is a variation of Gross and Kaiser’s (1996) approximate algorithm and is only applicable for two-dimensional data sets, but it is very fast and easy to implement. The second method is a mixed-integer linear programming approach that is slightly more involved but still fast and not limited by the dimension of the data set. |
| Keywords: | Demand theory; efficiency; nonparametric analysis; revealed preference; utility maximisation |
| JEL: | C14 D11 D12 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0523&r=upt |
| By: | Zoryana Olekseyuk; Hannah Schürenberg-Frosch |
| Abstract: | CGE models are widely used for policy evaluation and impact analysis especially with respect to trade reforms, tax reforms, energy sector reform and development policy analysis. However, the results of such models are often argued to be sensitive to the choice of exogenous parameters such as trade elasticities. Several authors show that the choice of the so-called Armington elasticities in the import demand function has a strong influence on the simulation results. Most existing estimates of Armington elasticities are only for the US. The few studies for other countries find substantially differing results. Nevertheless, many CGE modelers simply adopt the elasticities from the literature. This paper aims at providing estimated elasticities based on recent data for a larger group of European countries. Using cointegration and panel fixed effects analyses we estimate the first order condition resulting from cost minimization or utility maximization subject to the CES subutility or cost function in imports and domestic goods. The results show a rather large variation across sectors and countries and the magnitude is only partly comparable to the US elasticities. Moreover, in a small CGE application we are able to show that changing the elasticity set has a quantitative and even qualitative impact on CGE model results, which confi rms the concern that one might end up with biased results due to a misspecification of the elasticities. |
| Keywords: | Informal care; labour supply; cognitive ability; physical and mental health |
| JEL: | I12 J14 J18 J22 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0513&r=upt |