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on Utility Models and Prospect Theory |
| By: | Schmidt, Ulrich; Neyse, Levent; Aleknonyte, Milda |
| Abstract: | Standard economic theory assumes that individual risk taking decisions are independent from the social context. Recent experimental evidence however shows that the income of peers has a systematic impact on observed degrees of risk aversion. In particular, subjects strive for balance in the sense that they take higher risks if this gives them the chance to break even with their peers. The present paper is, to the best of our knowledge, the first systematic analysis of income inequality and risk taking. We perform a real effort field experiment where inequality is introduced to different wage rates. After the effort phase subjects can invest (part of) their salary into a risky asset. Besides the above mentioned possibility of higher risk taking of low-wage individuals to break even with high-wage individuals, risk taking can be influenced by an income effect consistent with e.g. decreasing absolute risk aversion and a house money effect of high- wage individuals. Our results show that the dominant impact of inequality on risk taking is what can be termed a social house money effect: high-wage individuals take higher risks than low- wage individuals only if they are aware of the inequality in wages. |
| Keywords: | Risk,Inequality,Real Effort,Field Experiment,Social Comparison |
| JEL: | D81 C93 D63 J31 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwkwp:2000&r=upt |
| By: | Cesar Martinelli (Interdisciplinary Center for Economic Science and Department of Economics, George Mason University); Mikhail Freer (Interdisciplinary Center for Economic Science and Department of Economics, George Mason University) |
| Abstract: | Following Richter (1966), we provide criteria under which a preference relation implied by a finite set of choice observations has a complete extension that can in turn be represented by a utility function. The usual properties of the original preference relation are inherited by the preference extension represented by the utility function. Noteworthy, our result relaxes the usual assumptions about the structure of budgets generating the observed choices. Against common wisdom, we show that (upper semi-)continuity does not come for free in general and it requires additional assumptions. |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:gms:wpaper:1059&r=upt |
| By: | Craig McLaren (Department of Economics, University of California Riverside) |
| Abstract: | This paper presents an alternate formulation of consumer theory that allows the consumer to be modeled as acquiring his/her goods dynamically, i.e. through a series of incremental decisions based on the outcomes of their predecessors. The model begins with the assumption that the consumer knows his /her Marginal Rates of Substitution (MRS), and defines a utility-like quantity in terms of their integral. The model is developed using the mathematics of vector analysis, which clarifies the intuition of what such integrals mean and provides a simple and useful means of expressing the convexity of indifference surfaces. A concept of marginal demand is introduced to capture the difference in the mix of goods a consumer would procure, were he/she to acquire them incrementally rather than through a single, utility maximizing decision |
| Keywords: | Dynamic Consumer Theory, Integrability, Convex Indifference Surface, Engle’s Law, Antonelli Conditions, Marginal Demand, Willingness to Pay, Contingent Valuation, Vector Analysis |
| JEL: | C50 C60 D11 D50 |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:ucr:wpaper:201507&r=upt |
| By: | Rosato, Antonio; Tymula, Agnieszka |
| Abstract: | We present results from an experiment with a within-subject design aimed at testing a unique prediction of expectations-based reference-dependent preferences and loss aversion in private-value second-price (Vickrey) auctions. If bidders have expectationsbased reference-dependent preferences, the total number of participants in an auction should affect bids in auctions for real objects but not in auctions with induced monetary values. Our findings are consistent with expectations-based reference-dependent preferences and loss aversion. In real-object auctions, subjects' bids are affected by the number of competitors and, on average, they decline with the intensity of competition. In induced-value auctions, instead, bids are unaffected by the intensity of competition. We also successfully replicate an experiment from Sprenger (2015) aimed at distinguishing expectations-based loss aversion from models of Disappointment Aversion. This provides additional evidence that our findings in the auction experiments are due to expectations-based loss aversion. |
| Keywords: | Auctions; Reference-Dependent Preferences; Loss Aversion; Expectations |
| JEL: | C91 C92 D03 D44 D81 D84 |
| Date: | 2016–02–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:69331&r=upt |
| By: | Pamela Jakiela (University of Maryland and IZA); Owen Ozier (Development Research Group, The World Bank) |
| Abstract: | This study estimates the impact of Kenya’s post-election violence on individual risk preferences. Because the crisis interrupted a longitudinal survey of more than five thousand Kenyan youth, this timing creates plausibly exogenous variation in exposure to civil conflict by the time of the survey. The study measures individual risk preferences using hypothetical lottery choice questions, which are validated by showing that they predict migration and entrepreneurship in the cross-section. The results indicate that the post-election violence sharply increased individual risk aversion. Immediately after the crisis, the fraction of subjects who are classified as either risk neutral or risk loving dropped by roughly 26 percent. The findings remain robust to an IV estimation strategy that exploits random assignment of respondents to waves of surveying. |
| Keywords: | Risk Preferences, Civil Conflict, Natural Experiment |
| JEL: | C91 C93 D01 D74 D81 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:hic:wpaper:204&r=upt |
| By: | Grundl, Serafin J. (Board of Governors of the Federal Reserve System (U.S.)); Zhu, Yu (University of Leicester) |
| Abstract: | We extent the point-identification result in Guerre, Perrigne, and Vuong (2009) to environments with one-dimensional unobserved auction heterogeneity. In addition, we also show a robustness result for the case where the exclusion restriction used for point identification is violated: We provide conditions to ensure that the primitives recovered under the violated exclusion restriction still bound the true primitives in this case. We propose a new Sieve Maximum Likelihood Estimator, show its consistency and illustrate its finite sample performance in a Monte Carlo experiment. We investigate the bias in risk aversion estimates if unobserved auction heterogeneity is ignored and explain why the sign of the bias depends on the correlation between the number of bidders and the unobserved auction heterogeneity. In an application to USFS timber auctions we find that the bidders are risk neutral, but we would reject risk neutrality without accounting for unobserved auction heterogeneity. |
| Keywords: | Estimation; First Price Auction; Identification; Risk Aversion; Unobserved Heterogeneity |
| Date: | 2015–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2015-89&r=upt |
| By: | Pondorfer, Andreas; Rehdanz, Katrin |
| Abstract: | One major challenge when conducting contingent valuation studies in developing countries is the choice of the appropriate payment vehicle. Since regular cash-income does not exist for the majority of the population and market integration is low, households in rural areas have less experience with monetary exchanges. In these cases labour time may be a more appropriate payment vehicle. A common finding of studies using labour time as the payment vehicle is that households are more often willing to contribute working time as compared to money. However, so far empirical evidence is missing if the labour time elicitation format reduces respondent's uncertainty of contributions. In this study we analyze and compare uncertainty of people's stated willingness to contribute (WTC) time and money for a local public good in a non-monetized small-scale community in Bougainville, Papua New Guinea. We do so by establishing an open-ended method for eliciting people's WTC, the Range-WTC-method, which elicits the upper and lower bound of a person's WTC. We find that uncertainty is reduced when respondents are asked for labour time contribution instead of monetary contributions. Thus, we provide empirical evidence that, indeed, labour time is the preferred to money in the elicitation of stated WTC in non-monetized communities. |
| Keywords: | Contingent valuation,Non-monetized community,Payment vehicles,Preference uncertainty |
| JEL: | D81 Q51 Q56 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwkwp:2010&r=upt |
| By: | 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); Hélène Latzer (CEREC - Université Saint-Louis - Bruxelles); Mathieu Parenti (CEPR - Centre for Economic Policy Research, ECARES - ULB - Université Libre de Bruxelles) |
| Abstract: | This paper introduces variable mark-ups in a horizontal-differentiation growth model by considering a larger class of preferences that nests the classic “CES” specification usually present in the workhorse love-for-variety models. Our first result is to obtain a generalized characterization of the Euler condition for this broader class of utility functions: in our model, the Euler rule features a supplementary term aiming at compensating the consumer for variations in the preference for variety along the consumption level. We are then also able to demonstrate that in our generalized framework, the economy’s balanced growth path displays both endogenous markups and a strictly positive growth rate of the number of available varieties (being the engine of growth). Finally, we show that under endogenous markups, the economy’s growth rate and firms’ market power can display a negative correlation, as opposed to the standard result obtained in the CES framework. |
| Keywords: | endogenous growth,variable markups,indirectly additive preferences |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01273255&r=upt |
| By: | Gerunov, Anton |
| Abstract: | This paper utilizes a novel data on consumer choice under uncertainty, obtained in a laboratory experiment in order to gain substantive knowledge of individual decision-making and to test the best modeling strategy. We compare the performance of logistic regression, discriminant analysis, naïve Bayes classifier, neural network, decision tree, and Random Forest (RF) to discover that the RF model robustly registers the highest classification accuracy. This model also reveals that apart from demographic and situational factors, consumer choice is highly dependent on social network effects. |
| Keywords: | choice, decision-making, social network, machine learning |
| JEL: | D12 D81 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:69199&r=upt |
| By: | Geir B. Asheim (Department of Economics, University of Oslo); Stéphane Zuber (Centre d'Economie de la Sorbonne - Paris School of Economics) |
| Abstract: | Climate policies have stochastic consequences that involve a great number of generations. This calls for evaluating social risk (what kind of societies will future people be born into) rather than individual risk (what will happen to people during their own lifetimes). We respond to this call by proposing and axiomatizing probability adjusted rank-discounted critical-level generalized utilitarianism (PARDCLU) through a key axiom ensuring that the social welfare order both is ethical and satisfies first-order stochastic dominance. PARDCLU yields a new useful perspective on intergenerational risks, is ethical in contrast to discounted utilitarianism, and avoids objections that have been raised against other ethical criteria. We show that PARDCLU handles situations with positive probability of human extinction and is linked to decision theory by yielding rank-dependent expected utilitarianism — but with additional structure — in a special case |
| Keywords: | Social evaluation; population ethics; decision-making under risk; critical-level utilitarianism; social discounting |
| JEL: | D63 D71 D81 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:16011&r=upt |
| By: | Christos Genakos; Costas Roumanias; Tommaso Valletti |
| Abstract: | We analyze consumer switching between mobile tariff plans using consumer-level panel data. Consumers receive reminders from a specialist price-comparison website about the precise amount they could save by switching to alternative plans. We find that the effect on switching of being informed about potential savings is positive and significant. Controlling for savings, we also find that the effect of incurring overage payments is also significant and six times larger in magnitude. Paying an amount that exceeds the recurrent monthly fee weighs more on the switching decision than being informed that one can save that same amount by switching to a less inclusive plan, implying that avoidance of losses motivates switching more than the realization of equal-sized gains. We interpret this as evidence of loss aversion. We are also able to weigh how considerations of risk versus loss aversion affect mobile tariff plan choices: we find that a uniform attitude towards risk in both losses and gains has no significant influence on predicting consumers’ switching, whereas perceiving potential savings as avoidance of losses, rather than as gains, has a strong and positive effect. |
| Keywords: | loss aversion; consumer switching; tariff plans; risk aversion; mobile telephony |
| JEL: | D10 D12 D81 L96 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:64966&r=upt |
| By: | Giorgio Calcagnini (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo" and Mo.Fi.R., Ancona, Italy); Germana Giombini (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo" and Mo.Fi.R., Ancona, Italy); Paolo Liberati (Department of Economics, Università degli Studi di Roma Tre, Rome, Italy.); Giuseppe Travaglini (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo") |
| Abstract: | TIn this paper we present a model where technology transfer is embedded into a competitive model of utility and profit maximization and is the result of a matching process between heterogeneous Knowledge Transfer Offices (KTOs) and innovative firmrms. Our model improves on previous literature by endogenizing the process that drives the dynamics of university researchers in search and firm vacant projects. We are able to show that the KTOs' reservation fee rate must be greater than the ratio between the marginal researcher cost and the marginal utility of matched projects, and that technology transfer strictly depends on the efficiency units of searching researchers and vacant projects. Further, we show that firm technological progress might be too low when KTOs too much intensively search for project matches. This occurs because both sides of the market ignore the externalities of their decisions. Finally, behavioral complementarity, substitutability, and free riding are all potential equilibrium outcomes. |
| Keywords: | Technology transfer, Matching, Externalities |
| JEL: | O31 O32 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:urb:wpaper:15_09&r=upt |
| By: | Ismael Mourifie; Aloysius Siow |
| Abstract: | This paper proposes an easy to estimate Cobb Douglas marriage matching function (MMF). Special cases include the Choo Siow (CS) MMF, CS with peer effects, CS with frictional transfers, the Dagsvik Menzel non-transferable utility MMF and Chiappori, Salanie and Weiss MMF. Given population supplies and admissible parameters, the Cobb Douglas MMF exists and is unique. This MMF is estimated on US marriage and cohabitation data by states from 1990 to 2010. CS with peer effects is not rejected. There are peer and scale eects in the US marriage markets. Positive assortative matching in marriage and cohabitation by educational attainment are relatively stable from 1990 to 2010. |
| Keywords: | Marriage matching, Peer effects, Cohabitation, equilibrium |
| JEL: | C78 D3 J21 J23 J31 J41 |
| Date: | 2015–01–29 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-531&r=upt |
| By: | Brancati, Emanuele (LUISS Guido Carli); Macchiavelli, Marco (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | The recent Global Games literature makes important predictions on how financial crises unfold. We test the empirical relevance of these theories by analyzing how dispersed information affects banks' default risk. We find evidence that precise information acts as a coordination device which reduces creditors' willingness to roll over debt to a bank, thus increasing both its default risk and its vulnerability to changes in expectations. We establish two new results. First, given an unfavorable median forecast, less dispersed beliefs greatly increase default risk; this is consistent with incomplete information models that rely on coordination risk while in contrast with a wide range of models that neglect this component. Second, less dispersion of beliefs amplifies the reaction of default risk to changes in market expectations; importantly, precise information raises banks' vulnerability by more than standard measures of banks' fragility. Taken together, our results suggest that enhanced transparency, by providing agents with more precise information, increases banks' vulnerability to changes in sentiment and raises the default risk of weaker banks. Finally, we address concerns of endogeneity of market expectations by introducing a novel set of instruments. |
| Keywords: | CDS Spreads; Coordination Risk; Dispersed Information; Financial Crisis; Global Games |
| JEL: | D83 G01 G21 |
| Date: | 2015–08–13 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2015-79&r=upt |
| By: | Antony Millner; Geoffrey Heal |
| Abstract: | We study collective choice when individuals have heterogeneous discounted utilitarian preferences. Two attractive properties of intertemporal preferences are indistinguishable for individuals, but have dramatically different implications for collective choice. Time Consistency requires a plan that is optimal at one evaluation date to be optimal at all later evaluation dates, while Time Invariance requires preferences to be unchanged under translations of the time axis. We study the implications of these two properties in a tractable dynamic model that captures both common resource and public goods problems. Utilitarian social planners implement the first best if collective preferences are time consistent, but not if they are time invariant. Decentralized alternatives { property rights (for common resources) and voting (for public goods) { can strictly improve on the planning equilibrium if social preferences are time invariant. We reflect on the implications of these fndings for dynamic welfare economics. Revealed preference cannot determine which property we should adopt, but each property is normatively attractive in some contexts. |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:lsg:lsgwps:wp220&r=upt |
| By: | Thibault, Emmanuel |
| Abstract: | We show that contrary to conventional wisdom intergenerational family transfers dominate fiscal policies as a remedy to the dynamic inefficiency arising in a Diamond (1965, American Economic Review) economy with logarithmic utility and Cobb-Douglas technology. Using the demonstration-effect approach popularized by Cox and Stark (2005, Journal of Public Economics), we prove that, differently from public debt, family transfers can serve the role of automatic stabilizers. Indeed, they are nil under dynamic efficiency, implying that both capital accumulation and welfare are not worsened. They are positive under dynamic inefficiency, and instrumental to depress capital accumulation so to approach the Golden Rule capital stock. |
| Keywords: | OLG model, Dynamic efficiency, Intergenerational family transfers. |
| JEL: | C62 D91 O41 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:30013&r=upt |
| By: | Da Silva, Sergio; Matsushita, Raul; De Sousa, Maicon |
| Abstract: | We evaluate utilitarian judgments under the dual-system approach of the mind. In the study, participants respond to a cognitive reflection test and five (sacrificial and greater good) dilemmas that pit utilitarian and non-utilitarian options against each other. There is judgment reversal across the dilemmas, a result that casts doubt in considering utilitarianism as a stable, ethical standard to evaluate the quality of moral judgments. In all the dilemmas, participants find the utilitarian judgment too demanding in terms of cognitive currency because it requires non-automatic, deliberative thinking. In turn, their moral intuitions related to the automatic mind are frame dependent, and thus can be either utilitarian or non-utilitarian. This suggests that automatic moral judgments are about descriptions, not about substance. |
| Keywords: | Cognitive Reflection, Utilitarianism, Moral Judgments |
| JEL: | B41 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:69387&r=upt |
| By: | CUERVO, Daniel Palhazi; KESSELS, Roselinde; GOOS, Peter; SÖRENSEN, Kenneth |
| Abstract: | Stated choice experiments are conducted to identify the attributes that drive people's preferences when choosing between competing options of products or services. They are widely used in transportation in order to support the decision making of companies and governmental authorities. A large number of attributes might increase the complexity of the choice task in a choice experiment, and have a detrimental effect on the quality of the results obtained. In order to reduce the cognitive effort required by the experiment, researchers may resort to experimental designs where the levels of some attributes are held constant within a choice situation. These designs are called partial profile designs. In this paper, we propose an integrated algorithm for the generation of D-optimal designs for stated choice experiments with partial profiles. This algorithm optimizes the set of constant attributes and the levels of the varying attributes simultaneously. An extensive computational experiment shows that the designs produced by the integrated algorithm outperform those obtained by existing algorithms, and match the optimal designs that have been analytically derived for a number of benchmark instances. We also evaluate the performance of the algorithm under varying experimental conditions and study the structure of the designs generated. |
| Keywords: | Stated choice experiments, Multinomial logit model, Partial profiles, (Bayesian) D-optimality, Utility-neutral designs, Coordinate-exchange algorithm |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:ant:wpaper:2015004&r=upt |