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on Utility Models and Prospect Theory |
| By: | Richard W. Evans (Department of Economics, Brigham Young University); Kerk L. Phillips (Department of Economics, Brigham Young University) |
| Abstract: | Utility functions that are additively-separable in goods consumption and leisure are often used in dynamic stochastic general equilibrium (DSGE) models. This paper illustrates how the use of an elliptical functional form for the utility of leisure can be substituted for the more common constant relative risk aversion (CRRA) or constant Frisch elasticity (CFE) utility functions. The advantage of this is that it rules out the possibility of households demanding leisure or labor that exceeds their time endowment. A non-negatively constraint on leisure or labor can be incorporated into a model, of course. However, in very large heterogeneous agent models, it is often advantageous to avoid the computational burden associated with such occasionally-binding constraints. Using two simple models, we show that behavior with elliptical utility closely matches that CFE disutility. The match with CRRA utility is not as close, but still good. |
| Keywords: | ellipse, labor, leisure, utility, Inada conditions, occasionally-binding constraints, interior solutions |
| JEL: | C02 C62 C65 J20 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:byu:byumcl:201501&r=upt |
| By: | Khelifi, Atef |
| Abstract: | Despite ‘joy of giving models’ have been extensively examined in the literature, the Ramsey growth model has never been explored under the assumption of a direct preference for bequeathing savings that are reinvested. This assumption implies a Utility function depending on both consumption and savings, which may also be motivated as one that captures a direct preference for thriftiness or wealth accumulation arguably involved. The resulting growth model generalizes those accounting for the capitalist spirit as Zou (1994), and shows that the restrictive standard one is perhaps not the actual optimized version of the Solow model. (JEL O41, E21, D91). |
| Keywords: | Ramsey model; Optimal Growth; Optimal control; Savings decision; bequest; joy-of-giving |
| JEL: | D5 D91 E1 E2 O41 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:60125&r=upt |
| By: | Francesco Menoncin (University of Brescia); Luca Regis (IMT Institute for Advanced Studies Lucca) |
| Abstract: | We derive a closed form solution for the optimal consumption/investment problem of an agent whose force of mortality is stochastic and whose financial horizon coincides with a fixed retirement date. The investment set includes a longevity asset, as a derivative on the force of mortality. We explore the optimal choices of a representative agent having Hyperbolic Absolute Risk Aversion preferences on both consumption and final wealth. Our numerical analysis shows that individuals optimally invest a large fraction of their wealth in the longevity asset. In our base scenario, calibrated on real world data, a 60-year old male retiring after 5 years should invest around 88% of his wealth in the longevity asset. Such a percentage decreases as time to retirement decreases. We explore sensitivity of our results to market and individual characteristics. |
| Keywords: | longevity risk, pre-retirement savings, consumption/portfolio choices, HARA preferences |
| JEL: | C61 G11 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:ial:wpaper:2/2015&r=upt |
| By: | Mkwara, Lena; Marsh, Dan; Scarpa, Riccardo |
| Keywords: | Community/Rural/Urban Development, Consumer/Household Economics, Productivity Analysis, |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aare15:202532&r=upt |
| By: | Crosetto, Paolo (Université de Grenoble); Filippin, Antonio (University of Milan) |
| Abstract: | It has been shown that subjects tend to follow others' behavior even when the external signals are uninformative. In this paper we go one step further, showing that conformism occurs even when the choices of others are not even presented to the subjects, but just indirectly perceived. We use the "Click" version of the Bomb Risk Elicitation Task, in which subjects can infer the behavior of others only from the mass of clicks heard. This signal is payoff-irrelevant and largely uninformative about the actual choices of the other participants. Moreover, it is never mentioned in the instructions and therefore it must be spontaneously (and possibly unconsciously) perceived in order to be used. We control the exposure of subjects to clicks by implementing treatments with and without earmuffs. Moreover, we test whether the introduction of a minimal form of commonality, i.e., facing a common rather than individual resolution of uncertainty, makes conformism more likely to emerge. We find strong evidence of conformist behavior even in such an adverse environment. Simply hearing the others clicking affects subjects' behavior. Introducing a common random draw results in a further dramatic shift of the average choices, in particular by women. |
| Keywords: | conformism, risk attitude, experiment |
| JEL: | C81 C91 D81 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp9029&r=upt |
| By: | Elena Boguslavskaya; Dmitry Muravey |
| Abstract: | In this paper we consider a variation of the Merton's problem with stochastic volatility and finite time horizon. The corresponded optimal control problem may be reduced to a linear parabolic boundary problem under some assumptions on the underlying process and the utility function. The resulting parabolic PDE is often quite difficult to solve, even when it is linear. In several special cases the explicit solutions were obtained. The present paper contributes to the pool of explicit solutions for stochastic optimal control problems. Our main result is the exact solution to the optimal control problem within the framework of the Heston model. |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1505.02431&r=upt |
| By: | Randall, Alan |
| Keywords: | Public Economics, Risk and Uncertainty, |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aare15:202574&r=upt |
| By: | Guyonne Kalb (Melbourne Institute of Applied Economic and Social Research, University of Melbourne); Daniel Kuehnle (University of Erlangen-Nuremberg); Anthony Scott (Melbourne Institute of Applied Economic and Social Research, University of Melbourne); Terence Chai Cheng (School of Economics, The University of Adelaide); Sung-Hee Jeon (Statistics Canada) |
| Abstract: | Few papers examine the pecuniary and non-pecuniary determinants of doctors’ labour supply despite substantial predicted shortages in many OECD countries. We contribute to the literature by applying both a structural discrete choice and a reduced-form approach. Using detailed survey data for Australian physicians, we examine how these different modelling approaches affect estimated wage elasticities at the intensive margin. We show that all modelling approaches predict small negative wage elasticities for male and female General Practitioners (GPs) and specialists. Our detailed subgroup analysis does not reveal particularly strong responses to wage increases by any specific group. We show that the translog and Box-Cox utility functions outperform the quadratic utility function. Exploiting the advantages of the structural discrete choice model, we examine short-term effects at the intensive margin by calculating labour supply changes in response to 5 and 10% wage increases. The results show that such wage increases substantially reduce the full-time equivalent supply of male GPs, and to a lesser extent of male specialists and female GPs, but not of female specialists. |
| Keywords: | Labour supply, discrete choice model, wage elasticity, health workforce, MABEL |
| JEL: | I11 J22 J44 J21 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:iae:iaewps:wp2015n10&r=upt |