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on Utility Models and Prospect Theory |
| By: | Attema, Arthur ; Krol, Marieke ; van Exel, Job ; Brouwer, Werner |
| Abstract: | Willingness to pay (WTP) elicitations suffer from various methodological problems. This paper tests a recently proposed alternative approach to value WTP for health, making use of trade-offs between income and lifetime or quality of life. We apply three experimental elicitation procedures and analyze the responses under an additive and a multiplicative utility function over health and income. We report several interesting results. First, the data are highly skewed, but if we trim the 5% lowest and highest values, we obtain plausible WTP estimates. Second, the results differ considerably between procedures, indicating that WTP estimates are sensitive to the assumed utility function. Third, respondents appear to be loss averse for both health and money, which is consistent with assumptions from prospect theory. Finally, our results also indicate that respondents are more willing to trade quality of life than life years. |
| Keywords: | loss aversion; time tradeoff method; QALY; utility of health and wealth; willingness to pay |
| JEL: | B41 D03 I10 |
| Date: | 2014–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:61197&r=upt |
| By: | Minasyan, Vigen |
| Abstract: | The paper addresses a basic model of moral hazard (risk) [Gibbons, 2010; Gibbons, 2005] and suggests some of its modifications. In the basic model of moral risk, questions are put and examined that have not been considered in the previous researches. In particular, it is proved that the level of agent's efforts that maximizes its expected utility coincides with the level of efforts that minimize the risk of obtaining this maximum utility. Modifications of the moral risk model are considered where the optimal behavior of the principal and the agent considerably differ from the respective behavior in the moral risk model. The paper introduces moral risk measures VaR for the principal and VaR for the agent that specify the qualitative assessments of risk on the part of the principal and the agent in their relationships. |
| Keywords: | model of moral hazard (risk), expected utility, VaR for the principal, VaR for the agent, measure of the utility risk, lognormally distributed random variable. |
| JEL: | C10 G22 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:61469&r=upt |
| By: | Dayde, Charlotte ; Roussy, Caroline ; Chaib, Karim ; Ridier, Aude |
| Abstract: | The goal of this article is to give some guidelines when modeling farmers’ rotation choices through optimization models. To improve the accuracy of such models, researchers can i) sophisticate the utility function or ii) specify the production function and the constraints of the model. Based on an interactive approach involving farmers, a preliminary discrete determinist model is built and tested under changing crops prices. Then, two discrete stochastic modeling approaches are compared; in the first one, yield risk is accounted as main source of income variability and, in the second one, risk is incorporated as a stochastic constraint of monthly inaccessible field days. Results show that risk aversion little affects rotation choice. A stochastic labour constraint accounting for field inaccessibility has considerable more impact on crops choice, especially in presence of imperfect labour market. |
| Keywords: | Crop rotation, Labour constraint, Interactive approach, Discrete stochastic programming, Crop Production/Industries, |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:ags:eaae14:183036&r=upt |
| By: | Bozzola, Martina |
| Abstract: | We adopt a moment based approach to investigate how individual producers' optimize input usage, in particular irrigation water, taking into account their risk preferences. We rely on a panel data of 122,800 Italian farms, spread over 1981 to 2003. We capture both variation over farms and over time. We show that risk aversion has increased over time, while down-side risk aversion has been more stable and that farmers specializing in different crops exhibit different risk aversion and use irrigation water with diverse efficiency. Higher downside risk aversion is a key determinant in the decision to adopt irrigation technology. |
| Keywords: | risk attitude, method of moments, irrigation, production uncertainty, Environmental Economics and Policy, Risk and Uncertainty, |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:ags:eaae14:182771&r=upt |
| By: | Trojani, Fabio ; Wiehenkamp, Christian ; Wrampelmeyer, Jan |
| Abstract: | Model builders face ambiguity about the true data generating process. Consequently, they need to deal with ambiguity attitudes (inside uncertainty) and ambiguous financial reality (outside uncertainty) when developing and estimating financial models. We introduce a novel approach for systematically dealing with outside uncertainty in addition to inside uncertainty in a tractable way. By bounding the effects of ambiguous data features, we avoid the adverse consequences of outside uncertainty, such as strongly biased equity premiums and investment policies. In a real data application, we show that asset managers can be more reliably evaluated using our bounded-influence approach. |
| Keywords: | Knightian Uncertainty, Model Risk, Ambiguity Aversion, Robust Econometrics, Portfolio Choice, Option Pricing |
| JEL: | C13 C15 D81 G11 G12 |
| URL: | http://d.repec.org/n?u=RePEc:usg:sfwpfi:2014:18&r=upt |
| By: | Vorotnikova, Ekaterina ; Borisova, Tatiana ; VanSickle, John |
| Abstract: | The Strawberry Advisory System (SAS) was developed to improve temporal precision of fungicide application. Based on Net Present Value (NPV), it outperforms the traditional fungicide application method given weather and market conditions typical for Florida (Vorotnikova et al., 2014). This study uses stochastic dominance and efficiency with respect to a function (SDRF and SERF) criterion to rank ten-year NPV for SAS-based and traditional fungicide application methods, given a range of farmers’ risk preferences. SERF is a valuable tool because it incorporates a utility function and a range of decision-maker risk preferences. Data from two production experiments were used: 1) research trials at the University of Florida’s farm, and 2) field experiments at seven commercial strawberry farms, located in different Florida counties. Each experiment included two diseases, anthracnose and Botrytis, and two cultivars, more- and less-disease resistant. The results based on research trials show that for both diseases and cultivars, the SAS-based method is the most preferred given any farmers’ risk aversion levels. However, the results based on results from commercial farms show that while the SAS-based method ranks higher for the more-resistant cultivar, the traditional fungicide application method is preferred for the less-resistant cultivar, for any farmers’ risk preference. |
| Keywords: | stochastic efficiency, risk, production, Agribusiness, Production Economics, Risk and Uncertainty, |
| Date: | 2015–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:ags:saea15:196846&r=upt |
| By: | Alessandro Bucciol (Department of Economics (University of Verona) ); Raffaele Miniaci (University of Brescia ); Sergio Pastorello (University of Bologna ) |
| Abstract: | We develop a structural econometric model to elicit household-specific expectations about future financial asset returns and risk attitudes by using data on observed portfolio holdings and self-assessed willingness to bear financial risk. Our framework assumes that household portfolios are subject to short-selling constraints in stocks and bonds, and that financial investment decisions are taken conditional on real estate and business wealth. We derive an explicit solution for the model, and estimate its parameters using the US Survey of Consumer Finances from 1995 to 2010. The results show that our modified mean-variance model fits the data adequately, and that the demographic, occupational and educational characteristics of the investors are relevant in shaping risk aversion and return expectations. In contrast, wealth, income, and past market performance have limited impacts on expectations and risk aversion. |
| Keywords: | Household Finance; Risk Aversion; Expectations; Mean Variance Analysis; Truncated and Censored Models |
| JEL: | C34 D14 D81 G11 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:ver:wpaper:01/2015&r=upt |
| By: | Robinson, Derrick ; Hite, Diane |
| Abstract: | This is a preliminary, working paper. Please address all shortcoming and comments to Derrick Robinson. Thank you! |
| Keywords: | Consumer demand, food safety, Gulf Coast, seafood, perception, preference, random utility model, Consumer/Household Economics, Demand and Price Analysis, Food Consumption/Nutrition/Food Safety, D120, D180, |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:ags:saea15:196838&r=upt |
| By: | Kiyohiko G. Nishimura (Graduate School of Economics,The University of Tokyo ); Hiroyuki Ozaki (Faculty of Economics,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: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:upd:utppwp:040&r=upt |
| By: | Ryan, Mary ; O’Donoghue, Cathal ; Upton, Vincent |
| Abstract: | The role of forests in our environment is increasing in importance due to the multifunctional benefits forests provide to urban and rural communities in relation to climate change mitigation, water conservation and the provision of fibre for bioenergy. However, afforestation targets across Europe are not being met. Using Ireland as a case study, we try to understand why farm afforestation rates are falling, despite the availability of generous forestry subsidies. We use a novel technique to examine the afforestation participation decision using a life cycle choice methodology where we apply revealed choice methodology to afforestation for the first time. We find that the model coefficients coincide with expected economic theory relative to the utility maximisation of income, leisure and wealth (long term land value). However, we observe a cohort of farmers who do not plant forestry regardless of income derived, reflecting their preference to maintain the flexibility of the long term value of their land by continuing to farm. |
| Keywords: | Afforestation decision, life-cycle analysis, Land Economics/Use, |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:ags:eaae14:182753&r=upt |
| By: | Xu, Zhicheng ; Palma, Marco A. |
| Abstract: | The distribution of income and wealth resulting from risk-taking behavior significantly affects cooperation and risk-sharing in many areas in many governmental programs, including health insurance and agricultural production. This paper studies redistributive decision making and fairness preferences under different rooted risks using a laboratory experiment, in the treatment of which the subjects can endogenously determine whether they want to buy insurance before they face one of three possible outcomes that will be realized with equal probability. If the first outcome is realized, a high payment will be delivered regardless of whether the subject buys insurance or not. The second risk is an avoidable loss contingent upon the subject buying insurance. The third outcome is an inevitable loss, i.e., minimum payment will be delivered no matter if the subject has or does not have insurance. Then we investigate fairness preferences of randomly paired subjects who are informed about the choices and outcomes for both parties and are asked to make redistributive tasks. The experimental design mimics the scenario of risk-sharing in health insurance and agricultural production. We find that how people make redistributive decisions depends on the insurance purchase decisions and income inequality. The results provide some policy implications for improving insurance efficiency. |
| Keywords: | fairness, insurance, Health Economics and Policy, Institutional and Behavioral Economics, Public Economics, Risk and Uncertainty, C91, D31, D63, |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:ags:saea15:196649&r=upt |
| By: | Gnangnon, Kimm ; Moser, Constance Besse |
| Abstract: | We examine in this paper the impact of the tightening of IPRs, notably patents rights, and the adoption of utility model laws on export diversification. To perform our analysis, we used panel data covering 89 developing and developed countries (of which 55 developing countries) over the period 1975 - 2003, and Lewbel (2012)'s instrumental variable technique. Our results lead us to conclude that for developing countries, legal protection for minor and adaptive inventions could be a springboard for further strengthening of IPRs protection in spurring export diversification, which is essential for the structural change needed for their economic development. |
| Keywords: | Intellectual Property Rights,Utility Model Laws,Export Diversification,Lewbel Instrumental Variable Technique |
| JEL: | F14 O24 O34 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:wtowps:ersd201419&r=upt |
| By: | Sebastian Lehmann (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg ) |
| Abstract: | Pricing research suggests incentive-compatible evaluations when consumers’ situation-specific WTP is to be elicited. Especially, the lottery-based Becker-DeGroot-Marschak-mechanism (BDM) is recommended, as it seems to outperform other elicitation methods. In this study, the BDM was used to measure subjects’ WTP for eight shopping goods in binding purchase settings. In accordance with previous studies, the validity of elicited WTP measures was checked within subjects with respect to indicators of face and criterion validity (such as interest in buying, preference ratings, and compliance rates). In addition, this study observed real purchases of a separate validation sample measured under identical circumstances, thus assessing the predictive validity of WTPs elicited with the BDM. As a result, the BDM-based WTPs reveal a sufficient degree of internal face and criterion validity. However, the external validity in terms of predictive validity between WTP-based prediction and purchases of the validation sample seems limited. Specifically, this study found a substantial overestimation of WTP, and thus in the corresponding purchase rates in the BDM. Hence, a potential bias is indicated. However, contrary to the suggestions of earlier research, individual risk attitude or loss aversion, hence a potential gambling effect, seems not to bias BDM results or the decision whether to buy or not. |
| Keywords: | BDM, price research, WTP, gambling effect, risk attitude |
| JEL: | A20 D83 O30 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:mag:wpaper:150001&r=upt |
| By: | Boeri, Marco ; Brown, Hannah ; Longo, Alberto |
| Abstract: | The recent ‘horse meat scandal’ in Europe has sparked huge concerns among consumers, as horse meat was found in beef lasagne ready to be consumed. This study investigates consumers’ preferences towards characteristics of ready to heat lasagne, including origin of the meat, whether the meat is tested as beef, safety of the lasagne, and nutritional value, using Discrete Choice Experiments in six EU. Our sample of 4,598 consumers makes this the largest cross sectional study of this kind. The results of this study present evidence that consumers in Europe are concerned about the authenticity and origin of the meat. |
| Keywords: | Random Utility Maximisation, food safety, ready meals, horse meat scandal, consumer’s preferences, Food Consumption/Nutrition/Food Safety, |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:ags:eaae14:182830&r=upt |
| By: | Lukas Menkhoff ; Sahra Sakha |
| Abstract: | We compare seven established risk elicitation methods and investigate how they explain an extensive set of risky behavior from a large household survey. We find overall positive correlation between items and low explanatory power in terms of behavior. Using an average of seven risk elicitation methods reduces measurement noise and yields more predictive power. A reduced set of risk items yields the same external validity as the average of all seven methods. Hence, our multiple-item risk measures offer a more reliable way to measure risk preferences. Our results caution against the reliability of one risk method alone due to noise |
| Keywords: | Risk attitude; lab-in-the-field experiments; household survey; economic development |
| JEL: | D81 C93 O12 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1980&r=upt |