nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2015‒03‒27
ten papers chosen by
Alexander Harin
Modern University for the Humanities

  1. The Implementation Duality By Georg Nöldeke; Larry Samuelson
  2. History of the Concept of Value By J. E. King; Michael McLure
  3. Should a skeptical portfolio insurer use an optimal or a risk-based multiplier? By Maxime Bonelli; Daniel Mantilla-Garcia
  4. A nested recursive logit model for route choice analysis By Mai, Tien; Frejinger, Emma; Fosgerau, Mogens
  5. Can Risk Averse Households Make Risky Investments? The Role of Trust in Others By Alessandro Bucciol; Barbara Cavasso; Luca Zarri
  6. "Entitled" Politicians - Lessons in justice from the 2009 UK parliament expense scandal By Knut Ulsrud
  7. Rational Expectations Equilibria: Existence and Representation By Bhowmik, Anuj; Cao, Jiling
  8. Sunspot Fluctuations in Two-Sector Models: New Results with Additively-Separable Preferences By Frédéric Dufourt; Kazuo Nishimura; Alain Venditti
  9. The Implications of Daylight Saving Time: A Field Experiment on Cognitive Performance and Risk Taking By Markus Schaffner; Jayanta Sarkar; Benno Torgler; Uwe Dulleck
  10. A Unified Approach to Systemic Risk Measures via Acceptance Sets By Francesca Biagini; Jean-Pierre Fouque; Marco Frittelli; Thilo Meyer-Brandis

  1. By: Georg Nöldeke; Larry Samuelson (University of Basel)
    Abstract: We use the theory of abstract convexity to study adverse-selection principal-agent problems and two-sided matching problems, departing from much of the literature by not requiring quasilinear utility. We formulate and characterize a basic underlying implementation duality. We show how this duality can be used to obtain a sharpening of the taxation principle, to obtain a general existence result for solutions to the principal-agent problem, to show that (just as in the quasilinear case) all increasing decision functions are implementable under a single crossing condition, and to obtain an existence result for stable outcomes featuring positive assortative matching in a matching model.
    Keywords: Implementation, Duality, Galois Connection, Imperfectly Transferable Utility, Principal-Agent Model, Two-Sided Matching
    JEL: C62 C78 D82 D86
    Date: 2015
  2. By: J. E. King (La Trobe University, Victoria); Michael McLure (University of Western Australia)
    Abstract: In this historical review we distinguish between two broad categories of value theories, objective and subjective, which focus respectively on the conditions of production and on the preferences of consumers. The objective approach to value theory is discussed with respect to classical political economy and the labour theory of value and the Sraffian revival of classical value theory in the twentieth century. The subjective approach to value theory is discussed with reference to neoclassical economics, with emphasis on marginal utility and equilibrium; marginal productivity and the distribution of product; and enhancements to utility analysis developed in the late nineteenth and early twentieth centuries. We conclude with a very brief and speculative reflection on the challenge of the digital age for value theory. The paper has been prepared as an entry for the forthcoming second edition of the International Encylopedia of the Social and Behavioural Sciences (Elsevier).
    Date: 2014
  3. By: Maxime Bonelli (Inria research centre Sophia Antipolis / Koris International); Daniel Mantilla-Garcia (Edhec-Risk / Koris International)
    Abstract: Following recent evidence of out-of-sample stock market return predictability, the authors aim to evaluate whether the potential benefits suggested by asset allocation theory can actually be captured in the real world using expected return estimates from a predictive system. The question is addressed in the context of an investor maximizing the long-term growth rate of wealth under a maximum drawdown constraint, and compare the optimal strategy using the predictive system with a similar risk-based allocation strategy independent of expected return estimates. The authors find that the risk-based strategy implies nonetheless very variable and relatively high expected returns, and report important potential benefits in using the expected return estimates of the predictive system they used.
    Keywords: financial econometrics, return predictability, asset allocation, portfolio insurance.
    JEL: C58 G17 G11
    Date: 2014–10
  4. By: Mai, Tien; Frejinger, Emma; Fosgerau, Mogens
    Abstract: We propose a route choice model that relaxes the independence from irrelevant alternatives property of the logit model by allowing scale parameters to be link specific. Similar to the the recursive logit (RL) model proposed by Fosgerau et al. (2013), the choice of path is modelled as a sequence of link choices and the model does not require any sampling of choice sets. Furthermore, the model can be consistently estimated and efficiently used for prediction. A key challenge lies in the computation of the value functions, i.e. the expected maximum utility from any position in the network to a destination. The value functions are the solution to a system of non-linear equations. We propose an iterative method with dynamic accuracy that allows to efficiently solve these systems. We report estimation results and a cross-validation study for a real network. The results show that the NRL model yields sensible parameter estimates and the fit is significantly better than the RL model. Moreover, the NRL model outperforms the RL model in terms of prediction.
    Keywords: route choice modelling; nested recursive logit; substitution patterns; value iterations; maximum likelihood estimation; cross-validation
    JEL: C25
    Date: 2015–03–23
  5. By: Alessandro Bucciol (Department of Economics (University of Verona)); Barbara Cavasso (University of Padua); Luca Zarri (Department of Economics (University of Verona))
    Abstract: Using the 2006 wave of the Survey on Health, Ageing and Retirement in Europe (SHARE), this paper sheds light on the role jointly played by individuals’ financial risk tolerance and their level of trust in others (generalized trust) in affecting their risky assets investments. We document that large variation in risk tolerance and trust exists across European countries and households and we show that risky assets investments are more frequent and larger in households featuring either risk tolerance or (to a smaller extent) a combination of risk aversion and trust. Trust thus acts as a substitute (albeit an imperfect one) for risk tolerance. Our findings have implications for our understanding of heterogeneity in household financial decisions as well as of the role that trust can play as a lubricant of the economic system.
    Keywords: Portfolio Choice; Risk Tolerance, Generalized Trust
    JEL: D14 D03 G11 D81
    Date: 2015–03
  6. By: Knut Ulsrud (London School of Economics)
    Abstract: This paper analyzes politicians’ decisions to abuse or overuse their expense accounts and to retire, through the lens of organizational justice. While standard political science theory would usually attribute behavior to utility maximizing on the basis of politicians being a “bad†or “good†type, this paper paints a more nuanced picture of the reasons behind politicians’ choices. Using three wage votes in the UK parliament in 2008 to indicate MP perception of fairness, the paper analyzes data on expense accounts and retirement decisions from after the UK expense scandal in 2009. The paper advances theory of organizational justice by using a measure of overall justice, consisting of distributive and procedural justice elements. MPs with high and medium levels of perceived injustice had respectively £3240 and £2170 more in their expense accounts, and were 14.5% and 9.5% more likely to retire after the scandal, compared to MPs with low levels of perceived injustice. The paper discusses implications for how to prevent misconduct, by taking into account individual coping and fairness in process and outcome in institutional design on remuneration. It also provides direction for further research.
    Keywords: justice, fairness, politics, misconduct
    Date: 2014–06
  7. By: Bhowmik, Anuj; Cao, Jiling
    Abstract: In this paper, we continue to explore the equilibrium theory under ambiguity. For a model of a pure exchange and asymmetric information economy with a measure space of agents whose exogenous uncertainty is described by a complete probability space, we establish a representation theorem for a Bayesian or maximin rational expectations equilibrium allocation in terms of a state-wise Walrasian equilibrium allocation. This result also strengthens the theorems on the existence and representation of a (Bayesian) rational expectations equilibrium or a maximin rational expectations equilibrium in the literature.
    Keywords: Asymmetric information; Bayesian rational expectations equilibrium; Maximin rational expectations equilibrium; Pure exchange economy; Walrasian equilibrium.
    JEL: D51 D82
    Date: 2015–03–24
  8. By: Frédéric Dufourt (Aix-Marseille UniversitÈ (Aix-Marseille School of Economics), CNRS-GREQAM & EHESS and Institut Universitaire de France); Kazuo Nishimura (RIEB, Kobe University & KIER, Kyoto University); Alain Venditti (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & EDHEC)
    Abstract: We analyze local indeterminacy and sunspot-driven fluctuations in the standard two-sector model with additively separable preferences. We provide a detailed theoretical analysis enabling us to derive relevant bifurcation loci and to characterize the steady-state local stability properties as a function of various structural parameters influencing the degree of increasing returns to scale, the amount of intertemporal substitution in consumption, and the elasticity of the aggregate labor supply curve. On the theoretical side, we prove the existence of both a flip and a Hopf bifurcation locus in the corresponding parameter space. We also show that local indeterminacy can be obtained under any labor supply elasticity or under an arbitrarily low elasticity of intertemporal substitution in consumption. On the empirical side, we find that indeterminacy and sunspot fluctuations are robust features of two-sector models, prevailing for most empirically plausible calibrations for these parameters.
    Keywords: Indeterminacy, sunspots, two-sector model, sector-specific externalities, real business cycles
    JEL: C62 E32 O41
    Date: 2015–02
  9. By: Markus Schaffner; Jayanta Sarkar; Benno Torgler; Uwe Dulleck
    Abstract: To explore the effects of daylights saving time (DST) transition on cognitive performance and risk-taking behaviour immediately before and one week after the shift to DST, this study examines two Australian populations living in similar geographic surroundings who experience either no DST transition (Queensland) or a one-hour DST desynchronization (New South Wales). This exogenous variation creates natural control (QLD) and treatment (NSW) groups that enable isolation and identification of the DST transition’s effect on the two outcome variables. Proximity to the border ensures similar socio-demographic and socio-economic conditions and thus permits comparison of the cognitive performance and risk-taking behaviour of affected versus unaffected individuals. The results suggest that exposure to the DST transition has no significant impact on either cognitive performance or risk-taking behaviour.
    Keywords: Daylight Saving Time; Risk-Taking Behaviour; Cognitive Performance; Field Experiment
    JEL: D81 C93 C21 I1
    Date: 2015–03
  10. By: Francesca Biagini; Jean-Pierre Fouque; Marco Frittelli; Thilo Meyer-Brandis
    Abstract: The financial crisis has dramatically demonstrated that the traditional approach to apply univariate monetary risk measures to single institutions does not capture sufficiently the perilous systemic risk that is generated by the interconnectedness of the system entities and the corresponding contagion effects. This has brought awareness of the urgent need for novel approaches that capture systemic riskiness. The purpose of this paper is to specify a general methodological framework that is flexible enough to cover a wide range of possibilities to design systemic risk measures via multi-dimensional acceptance sets and aggregation functions, and to study corresponding examples. Existing systemic risk measures can usually be interpreted as the minimal capital needed to secure the system after aggregating individual risks. In contrast, our approach also includes systemic risk measures that can be interpreted as the minimal capital funds that secure the aggregated system by allocating capital to the single institutions before aggregating the individual risks. This allows for a possible ranking of the institutions in terms of systemic riskiness measured by the optimal allocations. Moreover, we also allow for the possibility of allocating the funds according to the future state of the system (random allocation). We provide conditions which ensure monotonicity, convexity, or quasi-convexity properties of our systemic risk measures.
    Date: 2015–03

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