
on Utility Models and Prospect Theory 
By:  Chiaki Hara (Kyoto Institute of Economic Research, Kyoto University); Toshiki Honda (Graduate School of International Corporate Strategy, Hitotsubashi University) 
Abstract:  We study the optimal portfolio choice problem for an ambiguityaverse investor having a utility function of the form of Klibanoff, Marinacci, and Mukerji (2005) and Maccheroni, Marinacci, and Rufino (2013) in an ambiguityinclusive CARAnormal setup. We extend the mutual fund theorem to accommodate ambiguity, identify a necessary and sufficient condition for a given portfolio to be optimal for some ambiguity averse investor, characterize all the ambiguity structure under which the given portfolio is optimal, and find the minimal ones in two senses to be made precise. We also calculate the minimal ambiguity structures based on the U.S. equity market data and find the smallest coefficient of ambiguity aversion with which the market portfolio is optimal is equal to 9.31. 
Keywords:  Ambiguity aversion, optimal portfolio, mutual fund theorem, FF6 portfolios, market portfolio 
JEL:  C38 D81 G11 
Date:  2016–06 
URL:  http://d.repec.org/n?u=RePEc:kyo:wpaper:943&r=upt 
By:  Huy N. Chau; Mikl\'os R\'asonyi 
Abstract:  We prove the existence of optimal strategies for agents with cumulative prospect theory preferences who trade in a continuoustime illiquid market, transcending known results which pertained only to riskaverse utility maximizers. The arguments exploit an extension of Skorohod's representation theorem for tight sequences of probability measures. This method is applicable in a number of similar optimization problems. 
Date:  2016–06 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1606.07311&r=upt 
By:  Vasilev, Aleksandar 
Abstract:  This paper explores the problem of nonconvex labor supply decisions in an economy with both private and public sector jobs. To this end, Hansen (1985) and Rogerson's (1988) indivisiblehours framework is extended to an environment featuring a double discrete labor choice. The novelty of the study is that the microfounded representation obtained from explicit aggregation over homogeneous individuals features different disutility of labor across the two sectors, which is in line with the observed difference in average wage rates (OECD 2011). This theorybased utility function could be then utilized to study labor supply responses over the business cycle. 
Keywords:  indivisible labor,public employment,aggregation,labor supply elasticity 
JEL:  J22 J30 J45 
Date:  2016 
URL:  http://d.repec.org/n?u=RePEc:zbw:esprep:142233&r=upt 
By:  Tadashi Sekiguchi; Katsutoshi Wakai 
Abstract:  We study the repeated Cournot duopoly with recursive utility where the players discount gains more than losses. First, as in the standard model of discounted utility, we confirm that the optimal punishment equilibrium has a stickandcarrot structure. Next, we explore its exact form in relation to the role of the asymmetry in discounting. We find that the discount factor used to evaluate losses controls the deterrence of a given punishment, while the discount factor used to evaluate gains influences the enforceability of the penalty. An increase in one of the two discount factors increases the most collusive equilibrium profit unless full collusion is already sustainable. However, the key to collusion is the loss discount factor: regardless of the level of the gain discount factor, full cooperation can be achieved if the loss discount factor is sufficiently high. 
Keywords:  Cournot duopoly, gain/loss asymmetry, optimal penal code, repeated game, recursive utility, utility smoothing 
JEL:  C73 D20 D90 L13 
Date:  2016–07 
URL:  http://d.repec.org/n?u=RePEc:kue:epaper:e16006&r=upt 
By:  Barbara Annicchiarico (DEF and CEIS, Università di Roma "Tor Vergata"); Alessandra Pelloni (DEF and CEIS, Università di Roma "Tor Vergata"); Fabrizio Valenti (DEF, Università di Roma "Tor Vergata") 
Abstract:  This paper studies the relationship between volatility and longrun growth in a complete market economy with human capital accumulation and EpsteinZin preferences. There is both crosscountry and timeseries evidence that volatility is associated with lower growth. Matching this evidence has proved a challenge for growth models with no market failures as they tend to predict the opposite for values of risk aversion higher than unity. However in our model, risk aversion and intertemporal elasticity of substitution are allowed to move independently of each other, and when both are relatively high or relatively low, the relationship between volatility and growth is negative. Indeed this is the case for parametrizations of preferences in line with the literature. 
Keywords:  Growth and Uncertainty; EpsteinZin Preferences; Intertemporal Elasticity of Substitution; Risk Aversion 
JEL:  D92 E22 E32 O49 
Date:  2016–06–24 
URL:  http://d.repec.org/n?u=RePEc:rtv:ceisrp:387&r=upt 
By:  Straub, Ludwig; Ulbricht, Robert 
Abstract:  Many important statistics in macroeconomics and finance  such as crosssectional dispersions, risk, volatility, or uncertainty  are second moments. In this paper, we explore a mechanism by which second moments naturally and endogenously fluctuate over time as nonlinear transformations of fundamentals. Specifically, we provide general results that characterize second moments of transformed random variables when the underlying fundamentals are subject to distributional shifts that affect their means, but not their variances. We illustrate the usefulness of our results with a series of applications to (1) the cyclicality of the crosssectional dispersions of macroeconomic variables, (2) the dispersion of MRPKs, (3) security pricing, and (4) endogenous uncertainty in Bayesian inference problems. 
Keywords:  Crosssectional dispersion, endogenous uncertainty, monotone likelihood ratio property, nonlinear transformations, risk, second moments, volatility. 
JEL:  C19 D83 E32 G13 
Date:  2016–06 
URL:  http://d.repec.org/n?u=RePEc:tse:wpaper:30521&r=upt 
By:  Georgios Gerasimou 
Abstract:  We show that strictly monotonic and riskneutral Bewley preferences on the set of purely uncertain monetary acts over a finite state space are associated with a degenerate indifference relation. This conclusion is valid irrespective of whether strict or weak preferences are taken as primitive. In the latter case, it follows from this result that such a decision maker is indifferent between distinct acts only if her preferences are complete. 
Keywords:  Bewley preferences; incomplete preferences; risk neutrality; degenerate indifference 
JEL:  D01 D03 D11 
Date:  2016–06–23 
URL:  http://d.repec.org/n?u=RePEc:san:wpecon:1609&r=upt 
By:  Stéphane Gonzalez (Université de Lyon, Lyon F 69007, France; CNRS, GATE LSE, Ecully, F 69130, France; Université J. Monnet, SaintEtienne, F 42000, France); Aymeric Lardon (University of Nice SophiaAntipolis, CNRS, GREDEG UMR 7321, F06560 Valbonne, France) 
Abstract:  We introduce axiomatically a new solution concept for cooperative games with transferable utility inspired by the core. While core solution concepts have investigated the sustainability of cooperation among players, our solution concept, called contraction core, focuses on the deterrence of cooperation. The main interest of the contraction core is to provide a monetary measure of the robustness of cooperation into the grand coalition. We motivate this concept by providing optimal fine imposed by competition authorities for the dismantling of cartels in oligopolistic markets. We characterize the contraction core on the set of balanced cooperative games with transferable utility by four axioms: the two classic axioms of nonemptiness and individual rationality, a superadditivity principle and a new axiom of consistency. 
Keywords:  TUgame, contraction core, optimal fine, Cournot oligopoly, axiomatization 
JEL:  C71 D43 
Date:  2016 
URL:  http://d.repec.org/n?u=RePEc:gat:wpaper:1621&r=upt 
By:  Arvaniti, Maria (CERE and the Department of Economics, Umeå University) 
Abstract:  Building upon the work of Pindyck(2012), I show how different assumptions regarding the utility and damage functions can support the immediate adoption of a stringent abatement policy. I employ an additive rather than a multiplicative form for the utility function and a damage function that accounts for extreme climate change. Using the distribution for temperature change and the economic impact provided by Pindyck (2012), based on information from the IPCC (2007) and recent IAMs, I estimate a simple measure of “willingness to pay". My specifications lead to significantly higher estimations for the WTP than in Pindyck and in some extreme cases to a value close to 1. Although one could not strongly argue which is the right specification for the model, the analysis suggests that seemingly small differences in modelling can have very different policy implications. 
Keywords:  environmental policy; climate change; uncertainty; catastrophic outcomes; willingness to pay 
JEL:  Q54 
Date:  2016–06–22 
URL:  http://d.repec.org/n?u=RePEc:hhs:slucer:2016_011&r=upt 
By:  Ingebretsen Carlson, Jim (Department of Economics, Lund University) 
Abstract:  This paper presents a combinatorial auction which is of particular interest when short completion times are of importance. It is based on a method for approximating the bidders' preferences over two types of items when complementarity between the two may exist. The resulting approximated preference relation is shown to be complete and transitive at any given price vector. It is shown that an approximated Walrasian equilibrium always exists if the approximated preferences of the bidders comply with the gross substitutes condition. This condition also ensures that the set of approximated equilibrium prices forms a complete lattice. A process is proposed which is shown to always reach the smallest approximated Walrasian price vector. 
Keywords:  Approximate auction; approximated preferences; nonquasilinear preferences 
JEL:  D44 
Date:  2016–06–22 
URL:  http://d.repec.org/n?u=RePEc:hhs:lunewp:2016_012&r=upt 
By:  Böheim, René (University of Linz); Freudenthaler, Christoph (University of Linz); Lackner, Mario (University of Linz) 
Abstract:  We analyze gender differences in risktaking in highpressure situations. Using novel data from professional athletes (NBA and WNBA), we find that male teams increase their risktaking towards the end of matches when a successful risky strategy could secure winning the match. Female teams, in contrast, reduce their risktaking in these situations. The less time left in a match, the larger is the gap. When the costs of an unsuccessful risky strategy are very large (losing the tournament), we find no increase in risktaking for male teams. 
Keywords:  risktaking, gender differences, tournament incentives 
JEL:  D81 J16 L83 
Date:  2016–06 
URL:  http://d.repec.org/n?u=RePEc:iza:izadps:dp10011&r=upt 
By:  Alex Dickson (Department of Economics, University of Strathclyde); Ian A MacKenzie (School of Economics, University of Queensland); Petros Sekeris (Department of Economics & Finance, University of Portsmouth) 
Abstract:  This article investigates contests when heterogeneous players compete to obtain a share of a prize. We prove the existence and uniqueness of the Nash equilibrium when players have general preference structures. Our results show that many of the standard conclusions obtained in the analysis of contests  such as aggregate effort increasing in the size of the prize and the dissipation ratio invariant to the size of the prize  may no longer hold under a general preference setting. We derive the key conditions on preferences, which involve the rate of change of the marginal rate of substitution between a player's share of the prize and their effort within the contest, under which these counterintuitive results may hold. Our approach is able to nest conventional contest analysis  the study of (quasi)linear preferences  as well as allowing for a much broader class of utility functions, which include both separable and nonseparable utility structures. 
Keywords:  contest, general preferences, aggregative game 
JEL:  C72 D72 
Date:  2016–06 
URL:  http://d.repec.org/n?u=RePEc:str:wpaper:1608&r=upt 
By:  Engelson, Leonid; Fosgerau, Mogens 
Abstract:  This paper explores the relationships between three types of measures of the cost of travel time variability: measures based on scheduling preferences and implicit departure time choice, Bernoulli type measures based on a univariate function of travel time, and meandispersion measures. We characterise measures that are both scheduling measures and meandispersion measures and measures that are both Bernoulli and meandispersion. There are no measures that are both scheduling and Bernoulli. We consider the impact of requiring that measures are additive or homogeneous, proving also a new strong result on the utility rates in an additive scheduling measure. These insights are useful for selecting cost measures to use in applications. 
Keywords:  value; travel time; variability; reliability 
JEL:  D1 D8 R4 
Date:  2016 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:72255&r=upt 
By:  David Crainich (CNRSLEM 9221 and IESEG School of Management); Louis Eeckhoudt (IESEG School of Management (LEM 9221CNRS)) 
Abstract:  Personal health related information modifies individuals’ willingness to pay for disease programs inasmuch as it allows health status assessment based on intrinsic (instead of average) characteristics. In this paper, we examine the effect that personalized about the baseline probability of disease has on the average willingness to pay programs reducing either the probability of disease (selfprotection) or the severity of disease (selfinsurance). We show that such an information rises the average willingness to pay for selfprotection while it increases the average willingness to pay for selfinsurance if health and wealth are complements (i.e. the marginal utility of wealth rises with health). 
Keywords:  Personalized health information; disease prevention; willingness to pay 
JEL:  D81 I18 
Date:  2016–02 
URL:  http://d.repec.org/n?u=RePEc:ies:wpaper:e201602&r=upt 
By:  Yves SPRUMONT 
Abstract:  We model social choices as acts mapping states of the world to (social) outcomes. A (social choice) rule assigns an act to every profile of subjective expected utility preferences over acts. A rule is strategyproof if no agent ever has an incentive to misrepresent her beliefs about the world or her valuation of the outcomes; it is expost efficient if the act selected at any given preference profile picks a Paretoefficient outcome in every state of the world. We show that every twoagent expost efficient and strategyproof rule is a top selection : the chosen act picks the most preferred outcome of some (possibly different) agent in every state of the world. The states in which an agentís top outcome is selected cannot vary with the reported valuations of the outcomes but may change with the reported beliefs. We give a complete characterization of the expost efficient and strategyproof rules in the twoagent, twostate case, and we identify a rich class of such rules in the twoagent case. 
Keywords:  social choice under uncertainty, strategyproofness, subjective expected utility 
JEL:  D71 
Date:  2016 
URL:  http://d.repec.org/n?u=RePEc:mtl:montec:072016&r=upt 