
on Utility Models and Prospect Theory 
By:  William Morrison, Robert Oxoby (Wilfrid Laurier University) 
Abstract:  We report on two laboratory experiments testing for the presence of loss aversion, separate from risk aversion, in decisions involving risk and intertemporal choice. Both experiments utilize an asset legitimacy protocol to control for ‘house money’ effects. In our first experiment, we augment the HoltLaury risk preference elicitation protocol to address the effects of loss aversion. In our second experiment, we explore loss aversion using a discount rate elicitation protocol that controls for risk preferences. Our results show that loss aversion can be separated from risk preferences and has a profound effect in decisionmaking. 
JEL:  C91 D91 
Date:  2016–07–01 
URL:  http://d.repec.org/n?u=RePEc:wlu:lcerpa:0096&r=upt 
By:  Moshe A. Milevsky; Thomas S. Salisbury 
Abstract:  Tontines were once a popular type of mortalitylinked investment pool. They promised enormous rewards to the last survivors at the expense of those died early. And, while this design appealed to the gambling instinc}, it is a suboptimal way to generate retirement income. Indeed, actuariallyfair life annuities making constant payments  where the insurance company is exposed to longevity risk  induce greater lifetime utility. However, tontines do not have to be structured the historical way, i.e. with a constant cash flow shared amongst a shrinking group of survivors. Moreover, insurance companies do not sell actuariallyfair life annuities, in part due to aggregate longevity risk. We derive the tontine structure that maximizes lifetime utility. Technically speaking we solve the EulerLagrange equation and examine its sensitivity to (i.) the size of the tontine pool $n$, and (ii.) individual longevity risk aversion $\gamma$. We examine how the optimal tontine varies with $\gamma$ and $n$, and prove some qualitative theorems about the optimal payout. Interestingly, Lorenzo de Tonti's original structure is optimal in the limit as longevity risk aversion $\gamma \to \infty$. We define the natural tontine as the function for which the payout declines in exact proportion to the survival probabilities, which we show is nearoptimal for all $\gamma$ and $n$. We conclude by comparing the utility of optimal tontines to the utility of loaded life annuities under reasonable demographic and economic conditions and find that the life annuity's advantage over the optimal tontine is minimal. In sum, this paper's contribution is to (i.) rekindle a discussion about a retirement income product that has been long neglected, and (ii.) leverage economic theory as well as tools from mathematical finance to design the next generation of tontine annuities. 
Date:  2016–10 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1610.10078&r=upt 
By:  Hideaki Tamura (Graduate School of Economics, Kobe University); Yoichi Matsuabayashi (Graduate School of Economics, Kobe University) 
Abstract:  Many extensive debates followed Mehra and Prescott fs (1985) sensational empirical results concerning the equity premium embodied in household equity portfolios. The problem of the equity premium?the Mehra?Prescott puzzle?arises because researchers overlook the factor of uncertainty in household consumption behaviour, thereby failing to account for the offsetting effect in the intertemporal substitution of consumption. Although many US empirical studies reject the consumptionbased capital asset pricing model under a timeseparable constant relative risk aversiontype utility function, we resolve this problem by formulating an expandedEuler equation that accommodates uncertainty using Mehra?Prescott fs original data. 
Keywords:  Intertemporal consumption, Precautionary saving, Uncertainty, Offsetting effect, Euler equation, Equity premium puzzle 
JEL:  C51 D81 D91 E21 G12 
Date:  2016–10 
URL:  http://d.repec.org/n?u=RePEc:koe:wpaper:1634&r=upt 
By:  Senda Ounaies (Centre d'Economie de la Sorbonne & Department of Mathematics  University El Manar Tunis); JeanMarc Bonnisseau (Centre d'Economie de la Sorbonne  Paris School of Economics); Souhail Chebbi (Department of Mathematics  King Saud University) 
Abstract:  In this paper, we consider a production economy with an unbounded attainable set where the consumers may have noncomplete nontransitive preferences. To get the existence of an equilibrium, we provide an asymptotic property on preferences for the attainable consumptions. We show that this condition holds true if the set of attainable allocations is compact or, when preferences are representable by utility functions, if the set of attainable individually rational utility levels is compact. So we extend the previous existence results with unbounded attainable sets in two ways by adding a production sector and considering general preferences 
Keywords:  production economy; unbounded attainable allocations; quasiequilibrium; non complete non transitive preferences 
JEL:  C62 D11 D51 
Date:  2016–08 
URL:  http://d.repec.org/n?u=RePEc:mse:cesdoc:16056&r=upt 
By:  Simon Dato; Andreas Grunewald; Daniel Müller 
Abstract:  This paper provides a comprehensive analysis regarding strategic interaction under expectationbased lossaversion. First, we develop a coherent framework for the analysis by extending the equilibrium concepts of Koszegi and Rabin (2006, 2007) to strategic interaction and demonstrate how to derive equilibria. Second, we delineate how expectationbased lossaverse players differ in their strategic behavior from their counterparts with standard expectedutility preferences. Third, we analyze equilibrium play under expectationbased loss aversion and comment on the existence of equilibria. 
Keywords:  NonCooperative Games, ExpectationBased Loss Aversion, ReferenceDependent Preferences, Mixed Strategies 
JEL:  C72 D01 D03 D81 
Date:  2016–02 
URL:  http://d.repec.org/n?u=RePEc:bon:bonedp:bgse02_2016&r=upt 
By:  Monica CostaDias (Institute for Fiscal Studies) 
Abstract:  We develop an equilibrium lifecycle model of education, marriage and labor supply and consumption in a transferable utility context. Individuals start by choosing their investments in education anticipating returns in the marriage market and the labor market. They then match based on the economic value of marriage and on preferences. Equilibrium in the marriage market determines intrahousehold allocation of resources. Following marriage households (married or single) save, supply labor and consume private and public under uncertainty. Marriage thus has the dual role of providing public goods and offering risk sharing. The model is estimated using the British Household Panel Survey. 
Date:  2016 
URL:  http://d.repec.org/n?u=RePEc:red:sed016:1285&r=upt 
By:  Ariel Neufeld; Mario Sikic 
Abstract:  We study a robust stochastic optimization problem in the quasisure setting in discretetime. We show that under a linealitytype condition the problem admits a maximizer. This condition is implied by the noarbitrage condition in models of financial markets. As a corollary, we obtain existence of an utility maximizer in the frictionless market model, markets with proportional transaction costs and also more general convex costs, like in the case of market impact. 
Date:  2016–10 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1610.09230&r=upt 
By:  Dinko Dimitrov (Saarland University); Emiliya A. Lazarova (University of East Anglia); ShaoChin Sung (Aoyama Gakuin University) 
Abstract:  In many applications of coalition formation games, a key issue is that some desirable coalition structures are not elements of the core of these games. In these cases, it would be useful for an authority which aims to implement a certain outcome to know how far from the original game is the nearest game where the desirable outcome is part of the core. This question is at the center of this study. Focusing on hedonic games, we uncover previously unexplored links between such games and transferrable utility games, and develop a tailormade so lution concept for the transferrable utility game, the implementation core, to provide an answer to our question. 
Keywords:  hedonic game, implementation core, Kemeny distance, stability 
JEL:  C71 D71 
Date:  2016–09–29 
URL:  http://d.repec.org/n?u=RePEc:uea:ueaeco:2016_09&r=upt 
By:  Myroslav Pidkuyko 
Abstract:  I present an endowment economy where a representative agent has recursive preferences over the consumption of nondurable and durable goods, and uncertainty about the underlying endowments. Using parameter calibration consistent with real business cycle literature (risk aversion coefficient of 2.1 and elasticity of intertemporal substitution of 1.09), the model generates a high level of equity premium and a low and stable riskfree rate. The model is also able to explain up to 60% of the equity volatility. The volatile expenditure on durable consumption goods generates a high and volatile equity premium; endogenous timevarying uncertainty produces a countercyclical equity premium. 
Date:  2016 
URL:  http://d.repec.org/n?u=RePEc:man:cgbcrp:225&r=upt 
By:  Amrita Dhillon; Andrew Pickering; Tomas Sjöström 
Abstract:  We examine default decisions under different political systems. If democratically elected politicians are unable to make credible commitments to repay externally held debt, default rates are inefficiently high because politicians internalize voter utility loss from repayment. Politicians who are motivated by electoral concerns are more likely to default in order to avoid voter utility losses, and, since lenders recognize this, interest rates and risk premiarise. Therefore, democracy potentially confers a credit market disadvantage. However, farsighted institutions that take into account how interest rates respond to default risk can ameliorate the disadvantage. Using a numerical measure of institutional farsightedness obtained from the Government Insight Business Risk and Conditions database, we …find that the observed relationship between creditratings and democratic status is indeed strongly conditional on farsightedness. With myopic institutions, democracy is estimated to cost on average about 2.5 investment grades. With farsighte institutions there is, if anything, a democratic advantage. 
Keywords:  Sovereign debt, Default, Risk premia, Autocracy, Democracy, Institutions 
JEL:  H63 F55 D72 D82 H75 O43 C72 
Date:  2016–11 
URL:  http://d.repec.org/n?u=RePEc:yor:yorken:16/13&r=upt 
By:  John Karl Scholz (University of WisconsinMadison); Ananth Seshadri (University of WisconsinMadison) 
Abstract:  We study the interaction between consumption and health in retirement. Our main contribution is the estimation of a consumption Euler equation taking health into consideration. The Euler equation is derived from a model of consumption in retirement with three important building blocks of health: health shocks, health as an investment and health as a provider of utility. We estimate the Euler equation using data from the Health and Retirement Study (HRS) and Consumption and Activities Mail Survey (CAMS). The estimates suggest that health is an important determinant of utility. We use the estimated model to study the empirical significance of the three building blocks of health. We find that health shocks play an important role in slowing down the decline of consumption with age in retirement. We also find that including health into the utility function could help explain the heterogeneous consumptionage profiles related to health. Finally, we find that health investments, such as physical exercise, have a significant effect on the evolutions of both health and consumption in retirement. 
Date:  2016–09 
URL:  http://d.repec.org/n?u=RePEc:mrr:papers:wp344&r=upt 
By:  Barron, Kai 
Abstract:  Bayes' statistical rule remains the status quo for modeling belief updating in both normative and descriptive models of behavior under uncertainty. Recent research has questioned the use of Bayes' rule in descriptive models of behavior, presenting evidence that people overweight 'good news' relative to 'bad news' when updating egorelevant beliefs. In this paper, we present experimental evidence testing whether this 'goodnews, badnews' effect extends to belief updating in the domain of financial decision making, i.e. the domain of most applied economic decision making. We find no evidence of asymmetric updating in this domain. In contrast, the average participant in our experiment is strikingly close to Bayesian in her belief updating. However, we show that this average behavior masks the existence of three distinct types of updating behavior  each of which is distinct from Bayesian, but none of which displays the 'goodnews, badnews' effect. 
Keywords:  economic experiments,Bayes' rule,asymmetric belief updating,belief measurement,proper scoring rules,subjective probability,motivated beliefs 
JEL:  C11 C91 D83 
Date:  2016 
URL:  http://d.repec.org/n?u=RePEc:zbw:wzbeoc:spii2016309&r=upt 
By:  John Duffy (Department of Economics, University of CaliforniaIrvine); Yue Li (SUNYAlbany) 
Abstract:  We report on a series of economic decisionmaking experiments exploring how individuals make lifecycle consumption and saving plans when they face different income profiles. We find that for every income profile we consider, subjects on average over consume in the early periods of life and underconsume in later periods of life relative to the conditional optimum and any sudden drop in income reduces their lifetime utility. We conduct a specification search for a model to explain our data and find that a twotype model with one type consuming the conditional optimum and the other type consuming endowments best fits our data. 
Keywords:  Bond markets; Lifecycle model; Consumption and savings; Retirement planning; Behavioral and experimental economics 
JEL:  C92 C91 D91 E21 H55 
Date:  2016–10 
URL:  http://d.repec.org/n?u=RePEc:irv:wpaper:161702&r=upt 
By:  Anna Bogomolnaia (National Research University Higher School of Economics); Herve Moulin (National Research University Higher School of Economics); Fedor Sandomirskiy (National Research University Higher School of Economics); Elena Yanovskaya (National Research University Higher School of Economics) 
Abstract:  When utilities are additive, we uncovered in our previous paper (Bogomolnaia et al. "Dividing Goods or Bads under Additive Utilities") many similarities but also surprising differences in the behavior of the familiar Competitive rule (with equal incomes), when we divide (private) goods or bads. The rule picks in both cases the critical points of the product of utilities (or disutilities) on the efficiency frontier, but there is only one such point if we share goods, while there can be exponentially many in the case of bads. We extend this analysis to the fair division of mixed items: each item can be viewed by some participants as a good and by others as a bad, with corresponding positive or negative marginal utilities. We find that the division of mixed items boils down, normatively as well as computationally, to a variant of an all goods problem, or of an all bads problem: in particular the task of dividing the non disposable items must be either good news for everyone, or bad news for everyone. If at least one feasible utility profile is positive, the Competitive rule picks the unique maximum of the product of (positive) utilities. If no feasible utility profile is positive, this rule picks all critical points of the product of disutilities on the efficient frontier 
Keywords:  fair division of goods and bads, competitive equilibrium with equal incomes, Nash product, envyfreeness 
JEL:  D61 D63 D82 
Date:  2016 
URL:  http://d.repec.org/n?u=RePEc:hig:wpaper:153/ec/2016&r=upt 
By:  D. Pennesi 
Abstract:  Empirical evidence suggests that choices are affected by the amount of time available to the decision maker. Time pressure or a coolingoff period (mandatory delay of choice) changes how choices are determined. Yet, few models are able to account for the role of available time on decisions. This paper proposes a dualself model in which a fast and a slow self bargain to decide: the longer is the decision process, the higher is the bargaining power of the slow self when deciding. A large variety of behaviors observed under time pressure or coolingoff can be explained by our model. Quantitative predictions concerning the effect of nudging through time manipulation are also provided. We characterize the model imposing testable conditions on revealed preferences combined with nonchoice data. 
JEL:  D01 D03 D11 D81 
Date:  2016–10 
URL:  http://d.repec.org/n?u=RePEc:bol:bodewp:wp1082&r=upt 
By:  Philipp Moehlmeier (Bielefeld University); Agnieszka Rusinowska (CES  Centre d'économie de la Sorbonne  UP1  Université PanthéonSorbonne  CNRS  Centre National de la Recherche Scientifique, PSE  Paris School of Economics); Emily Tanimura (CES  Centre d'économie de la Sorbonne  UP1  Université PanthéonSorbonne  CNRS  Centre National de la Recherche Scientifique) 
Abstract:  We develop a modification of the connections model by Jackson and Wolinsky (1996) that takes into account negative externalities arising from the connectivity of direct and indirect neighbors, thus combining aspects of the connections model and the coauthor model. We consider a general functional form for agents' utility that incorporates both the effects of distance and of neighbors' degree. Consequently, we introduce a framework that can be seen as a degreedistancebased connections model with both negative and positive externalities. Our analysis shows how the introduction of negative externalities modifies certain results about stability and efficiency compared to the original connections model. In particular, we see the emergence of new stable structures, such as a star with links between peripheral nodes. We also identify structures, for example, certain disconnected networks, that are efficient in our model but which could not be efficient in the original connections model. While our results are proved for the general utility function, some of them are illustrated by using a specific functional form of the degreedistancebased utility. 
Keywords:  network, externality, degree, distance, connections model 
Date:  2016 
URL:  http://d.repec.org/n?u=RePEc:hal:cesptp:hal01387467&r=upt 
By:  Stark, Oded; Jakubek, Marcin 
Abstract:  Let there be two individuals: "rich," and "poor." Due to inefficiency of the income redistribution policy, if a social planner were to tax the rich in order to transfer to the poor, only a fraction of the taxed income would be given to the poor. Under such inefficiency and a standard utility specification, a Rawlsian social planner who seeks to maximize the utility of the worstoff individual will select a different allocation of incomes than a utilitarian social planner who seeks to maximize the sum of the individuals' utilities. However, when individuals prefer not only to have more income but also not to have low status conceptualized as low relative income, and when this distaste is incorporated in the individuals' utility functions with a weight that is greater than a specified critical level, then a utilitarian social planner will select the very same income distribution as a Rawlsian social planner. 
Keywords:  Maximization of social welfare,Rawlsian social welfare function,Utilitarian social welfare function,Inefficient policy of income redistribution,Distaste for low status 
JEL:  D31 D60 H21 I38 
Date:  2016 
URL:  http://d.repec.org/n?u=RePEc:zbw:tuewef:92&r=upt 
By:  SEMIN KIM (Yonsei University) 
Abstract:  We consider the performance and incentive compatibility of voting rules in a Bayesian environment: agents have independent private values, there are at least three alternatives, and monetary transfers are prohibited. First, we show that in a neutral environment, meaning alternatives are symmetric exante, essentially any expost Pareto efficient ordinal rule is incentive compatible. Importantly, however, we can improve upon ordinal rules. We show that we can design an incentive compatible cardinal rule which achieves higher utilitarian social welfare than any ordinal rule. Finally, we provide numerical findings about incentive compatible cardinal rules that maximize utilitarian social welfare. 
Keywords:  Ordinal rule, Pareto efficiency, Incentive compatibility, Bayesian mechanism design. 
JEL:  C72 D01 D02 D72 D82 
Date:  2016–11 
URL:  http://d.repec.org/n?u=RePEc:yon:wpaper:2016rwp94&r=upt 