nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2015‒08‒30
ten papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Self-Signaling and Prosocial Behavior: a Cause Marketing Mobile Field Experiment By Jean-Pierre Dubé; Xueming Luo; Zheng Fang
  2. Income Expectations, Limited Liquidity, and Anomalies in Intertemporal Choice By Epper, Thomas
  3. Remittances and Relative Concerns in Rural China By Akay, Alpaslan; Bargain, Olivier B.; Giulietti, Corrado; Robalinod , Juan D.; Zimmermann, Klaus F.
  4. Portfolio Management and Stochastic Optimization in Discrete Time: An Application to Intraday Electricity Trading and Water Values for Hydroassets By Simone Farinelli; Luisa Tibiletti
  5. Bonacich Measures as Equilibria in Network Models By Hannu Salonen
  6. The Role of Time Preferences and Exponential-Growth Bias in Retirement Savings By Gopi Shah Goda; Matthew R. Levy; Colleen Flaherty Manchester; Aaron Sojourner; Joshua Tasoff
  7. "Inefficiency and Self-Determination: Simulation-based Evidence from Meiji Japan" By Eric Weese; Masayoshi Hayashi; Akihiko Takahashi
  8. Incomplete Markets and Aggregate Demand By Iván Werning
  9. Longevity, Age-Structure, and Optimal Schooling By Noël Bonneuil; Raouf Boucekkine
  10. The Labour Market Effects of Academic and Vocational Education over the Life Cycle: Evidence from Two British Cohorts By Brunello, Giorgio; Rocco, Lorenzo

  1. By: Jean-Pierre Dubé; Xueming Luo; Zheng Fang
    Abstract: We empirically test an information economics based theory of social preferences in which ego utility and self-signaling can potentially crowd out the effect of consumption utility on choices. Two large-scale, randomized controlled field experiments involving a consumer good and charitable donations are conducted using a subject pool of actual consumers. We find that bundling relatively large charitable donations with a consumer good can generate non-monotonic regions of demand. Consumers also self-report significantly lower ratings of “feeling good about themselves” when a large donation is bundled with a large price discount for the good. The combined evidence supports the self-signaling theory whereby price discounts crowd out a consumer’s self-inference of altruism from buying a good bundled with a charitable donation. Alternative theories of motivation crowding are unable to fit the non-monotonic moments in the data. A structural model of self-signaling is fit to the data to quantify the economic magnitude of ego utility and its role in driving consumer decisions.
    JEL: C7 C72 C9 C93 D03 D11 D12 D8 D81 M3 M30 M31
    Date: 2015–08
  2. By: Epper, Thomas
    Abstract: Intertemporal choices are a ubiquitous part of our economic lives. Decisions about education, savings and health, all involve tradeoffs between costs and benefits materializing at different points in time. Yet, a large body of experimental evidence questions the descriptive validity of the economic benchmark model (exponential discounted utility) by documenting a series of behavioral patterns allegedly violating its key predictions. Observed discount rates typically lie far beyond market interest rates, tend to decline in time horizon and in outcome magnitude, and seem to be larger for gains than for losses. Hyperbolic preference models resolve these issues only partly: These models accommodate excessive short-run discounting, but fail to predict both outcome dependence and sign dependence. This paper demonstrates that all these “anomalies” are rationalizable without introducing exotic preferences. Instead, an interplay between liquidity constraints and income expectations is able to produce these stylized facts, even if economic agents are fully rational and have a pure rate of time preference close to the market interest rate. Liquidity-constrained agents who dislike fluctuations in the consumption path, but expect their income to rise in the near future prefer to allocate newly available cash inflows at earlier dates than their pure rate of time preference suggests. The assumptions underlying this mechanism are likely to hold for typical participants in laboratory and field experiments. Beyond that, our approach also provides an explanation for a number of phenomena which have remained largely unexplained so far, such as reasons for observed discount rates to increase in time delay, the heterogeneity of discount rates across different commodities and regions, and the co-occurrence of stationarity and dynamic inconsistency. The mechanism is easily distinguished from hyperbolic preferences and optimistic outlook, and its key predictions are retained under bounded rationality and partial asset integration.
    Keywords: Time Preferences, Intertemporal Choice, Hyperbolic Discounting, Magnitude Effect, Sign Effect, Stationarity, Time Inconsistency, Expectations, Liquidity Constraints
    JEL: D03 D84 D91
    Date: 2015–08
  3. By: Akay, Alpaslan (Department of Economics, School of Business, Economics and Law, Göteborg University); Bargain, Olivier B. (Aix-Marseille Université and IZA); Giulietti, Corrado (IZA); Robalinod , Juan D. (Cornell University); Zimmermann, Klaus F. (IZA and Bonn University)
    Abstract: The paper investigates the impact of remittances on the relative concerns of households in rural China. Using the Rural to Urban Migration in China (RUMiC) dataset we estimate a series of well-being functions to simultaneously explore the relative concerns with respect to income and remittances. Our results show that although rural households experience substantial utility loss due to income comparisons, they gain utility by comparing their remittances with those received by their reference group. In other words, we find evidence of a “status-effect” with respect to income and of a “signal-effect” with respect to remittances. The magnitudes of these two opposite effects are very similar, implying that the utility reduction due to relative income is compensated by the utility gain due to relative remittances. This finding is robust to various specifications, controlling for the endogeneity of remittances and selective migration, as well as a measure of current migrants’ net remittances calculated using counterfactual income and expenditures.
    Keywords: positional concerns; remittances; subjective well-being
    JEL: C90 D63
    Date: 2015–08
  4. By: Simone Farinelli; Luisa Tibiletti
    Abstract: Hydro storage system optimization is becoming one of the most challenging task in Energy Finance. Following the Blomvall and Lindberg (2002) interior point model, we set up a stochastic multiperiod optimization procedure by means of a "bushy" recombining tree that provides fast computational results. Inequality constraints are packed into the objective function by the logarithmic barrier approach and the utility function is approximated by its second order Taylor polynomial. The optimal solution for the original problem is obtained as a diagonal sequence where the first diagonal dimension is the parameter controlling the logarithmic penalty and the second is the parameter for the Newton step in the construction of the approximated solution. Optimimal intraday electricity trading and water values for hydroassets are computed. The algorithm is implemented in Mathematica.
    Date: 2015–08
  5. By: Hannu Salonen (Department of Economics, University of Turku)
    Abstract: We investigate the cases when the Bonacich measures of strongly connected directed bipartite networks can be interpreted as a Nash equilibrium of a non-cooperative game. One such case is a two-person game such that the utility functions are bilinear, the matrices of these bilinear forms represent the network, and strategies have norm at most one. Another example is a two-person game with quadratic utility functions. A third example is an m + n person game with quadratic utilitity functions, where the matrices representing the network have dimension m × n. For connected directed bipartite networks we show that the Bonacich measures are unique and give a recursion formula for the computation of the measures. The Bonacich measures of such networks can be interpreted as a subgame perfect equilibrium path of an extensive form game with almost perfect information.
    Keywords: networks, influence measures, Nash equilibrium
    JEL: C71 D85
  6. By: Gopi Shah Goda; Matthew R. Levy; Colleen Flaherty Manchester; Aaron Sojourner; Joshua Tasoff
    Abstract: There is considerable variation in retirement savings within income, age, and educational categories. Using a broad sample of the U.S. population, we elicit time preference parameters from a quasi-hyperbolic discounting model, and perceptions of exponential growth. We find that present bias (PB), the tendency to value utility in the present over the future in a dynamically inconsistent way, and exponential-growth bias (EGB), the tendency to neglect compounding, are prevalent and distinct latent variables. PB, EGB, and the long-run discount factor are all highly significant in predicting retirement savings, even while controlling for measures of IQ and general financial literacy as well as a rich set of demographic controls. We find that lack of self-awareness of these biases has an additional independent negative impact on retirement savings. We assess potential threats to a causal interpretation of our results with a hypothetical choice experiment and several robustness exercises. Finally, we explore potential mechanisms for our findings. If the relationship we estimate is causal, our estimates suggest that eliminating PB and EGB would be associated with an increase in retirement savings of 12%, or as high as 70% using estimates that account for classical measurement error.
    JEL: H0
    Date: 2015–08
  7. By: Eric Weese (Department of Economics, Yale University); Masayoshi Hayashi (Faculty of Economics, The University of Tokyo); Akihiko Takahashi (College of Economics, Aoyama Gakuin University)
    Abstract: Does the exercise of the right of self-determination lead to inefficiency? This paper considers a set of centrally planned municipal mergers during the Meiji period, with data from Gifu prefecture. The observed merger pattern can be explained as a social optimum based on a very simple individual utility function. If individual villages had been allowed to choose their merger partners, counterfactual simulations show that the core is always non-empty, but core partitions contain about 80% more (postmerger) municipalities than the social optimum. Simulations are possible because core partitions can be calculated using repeated application of a mixed integer program.
    Date: 2015–08
  8. By: Iván Werning
    Abstract: I study aggregate consumption dynamics under incomplete markets, focusing on the relationship between consumption and the path for interest rates. I first provide a general aggregation result under extreme illiquidity (no borrowing and no outside assets), deriving a generalized Euler relation involving the real interest rate, current and future aggregate consumption. This provides a tractable way of incorporating incomplete markets in macroeconomic models, dealing only with aggregates. Although this relation does not necessarily coincide with the standard representative-agent Euler equation, I show that it does for an important benchmark specification. When this is the case, idiosyncratic uncertainty and incomplete markets leave their imprint by affecting the discount factor in this representation, but the sensitivity of consumption to current and future interest rates is unaffected. An immediate corollary is that “forward guidance” (lower future interest rates) is as powerful as in representative agent models. I show that the same representation holds with positive liquidity (borrowing and outside assets) when utility is logarithmic. I show that away from these benchmark cases, consumption is likely to become more sensitive to interest rate, and especially future interest rates. Finally, I apply my approach to a real business cycle economy, providing an exact analytical aggregation result that complements existing numerical results.
    JEL: D52 E0
    Date: 2015–08
  9. By: Noël Bonneuil (EHESS - École des hautes études en sciences sociales, INED - Institut national d'études démographiques); Raouf Boucekkine (AMSE - Aix-Marseille School of Economics - EHESS - École des hautes études en sciences sociales - Centre national de la recherche scientifique (CNRS) - Ecole Centrale Marseille (ECM) - AMU - Aix-Marseille Université, IUF - Institut Universitaire de France - M.E.N.E.S.R. - Ministère de l'Éducation nationale, de l’Enseignement supérieur et de la Recherche)
    Abstract: The mechanism stating that longer life implies larger investment in human capital, is premised on the view that individual decision-making governs the relationship between longevity and education. This relationship is revisited here from the perspective of optimal period school life expectancy, obtained from the utility maximization of the whole population characterized by its age structure and its age-specific fertility and mortality. Realistic life tables such as model life tables are mandatory, because the age distribution of mortality matters, notably at infant and juvenile ages. Optimal period school life expectancy varies with life expectancy and mortality. Applications to stable population models and then to French historical data from 1806 to nowadays show that the population age structure has indeed modified the relationship between longevity and optimal schooling
    Date: 2015–02
  10. By: Brunello, Giorgio (University of Padova); Rocco, Lorenzo (University of Padova)
    Abstract: Several commentators have argued that vocational education provides a smoother school to work transition than academic education. In the long - run, however, the skills it provides depreciate faster and individuals with this type of education are less capable of adapting to technical change. Because of this, its short – term advantages trade off with expected long-term disadvantages in terms of employment, wages or both. Using two UK cohort studies, that allow us to follow individuals for at least 16 years in the labour market, we investigate whether this view has empirical support. For employment, our results indicate that the initial advantage associated to vocational education declines over time, without turning however into a disadvantage at later ages. For real net wages, the picture is more nuanced, with results that vary by cohort and educational level. Overall, our evidence suggests that vocational education is associated to lower expected long-term utility only for the younger cohort with higher (post-secondary) education. We further distinguish between dominant and non-dominant vocational education to account for the different bundles of skills held by individuals, and find that those with a more balanced bundle tend to have higher expected long-term earnings.
    Keywords: vocational, academic education, UK
    JEL: J31
    Date: 2015–08

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