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on Utility Models and Prospect Theory |
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Issue of 2017‒01‒29
nine papers chosen by |
| By: | Sudhir A. Shah (Centre for Development Economics, Delhi School of Economics, University of Delhi, India) |
| Abstract: | We define vector-valued generalized Arrow-Pratt (GAP) coefficients for a utility defined on a Hilbert outcome space. Given risk averse, increasing and twice differentiable utilities on such outcome spaces, comparisons of their risk aversion using GAP coefficients are congruent to comparisons using well-founded decision-theoretic criteria. The Hilbert space setting admits risks embodied in a significant class of random processes, especially second-order processes. We also provide a theoretically well-founded and computationally tractable method for estimating the realized GAP coefficient from observed data when the outcome space is a reproducing kernel Hilbert space. We use the GAP coefficients to predict the effect of differences in risk aversion on an asset portfolio when assets are specified by dividend processes. Finally, we show a duality between utility functions on Euclidean spaces and GAP coeficients. |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:cde:cdewps:254&r=upt |
| By: | Soriano-Morales, Yazmín Viridiana; Vallejo-Jiménez, Benjamín; Venegas-Martínez, Francisco |
| Abstract: | This paper is aimed at assessing the impact of the degree of relative risk aversion on economic welfare for different levels of the interest rate and the exchange rate depreciation in a small open economy. To do this, a representative consumer-producer makes decisions on consumption, money balances, and leisure. In order to find a closed-form solution of the household’s economic welfare, it is assumed that individual’s preferences belong to the family of Constant Relative Risk Aversion (CRRA) utility functions. Several comparative statics graphical experiments about the effects of the degree of relative risk aversion on economic welfare for different levels of nominal variables are carried out. Finally, we find that, under the stated assumptions, household’s economic welfare seen as a function of the degree of relative risk aversion is responsive to different values of nominal variables. |
| Keywords: | Consumer-producer economics, economic welfare, degree of relative risk aversion, small open economy, interest rate, foreign exchange. |
| JEL: | E43 F31 |
| Date: | 2017–01–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:76441&r=upt |
| By: | T.M. van Huizen; Rob Alessie |
| Abstract: | Job mobility is inherently risky as workers have limited ex ante information about the quality of outside jobs. Using a large longitudinal Dutch dataset, which includes data on risk preferences elicited through (incentivized) experiments, we examine the relation between risk aversion and job mobility. The results for men show that risk averse workers are less likely to move to other jobs. For women, the evidence that risk aversion affects job mobility is weak. Our empirical findings indicate that the negative relation between risk aversion and job mobility is driven by the job acceptance rather than the search effort decision. |
| Keywords: | Job mobility, risk aversion, job search, risk preferences |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:1609&r=upt |
| By: | Bas Jacobs (Erasmus School of Economics, Tinbergen Institute, CESifo); Alexandra Victoria Rusu (Erasmus School of Economics, The Netherlands) |
| Abstract: | Why is it optimal not to tax capital income in the long-run in Chamley (1986) and Judd (1985)? This paper demonstrates that the answer follows standard intuitions from the commodity tax literature. In the steady state, Engel curves for consumption are linear in labour earnings, irrespective of the utility function adopted. Thus, in the steady state, consumption demands in each period become equally complementary to leisure over time. This renders taxes on capital income redundant, since they cannot alleviate distortions from taxing labour income. The argument that taxes on capital income should be zero because distortions explode in finite time is relevant only if restrictions are imposed on the utility function. We show how these restrictions imply that consumption demands in each period are equally complementary to leisure over time. We also demonstrate that the optimal tax on capital income is zero irrespective of whether the gross interest rate is endogenous. This contradicts arguments that the entire burden of capital income taxes is shifted to labour through general equilibrium effects on the interest rate. |
| Keywords: | taxation of capital income; zero capital income tax; Corlett-Hague motive; Chamley-Judd result |
| JEL: | H2 |
| Date: | 2017–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20170011&r=upt |
| By: | Gergely Varga (Corvinus University of Budapest); Janos Vincze (Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences and Corvinus University of Budapest) |
| Abstract: | We set up an agent-based macromodel focusing on consumption-saving without the assumption of utility maximization, but preserving certain "rational" aspects of human choice based on the idea of ecological rationality Todd et al. (2012). In this framework we address the classical problem of the efficiency of long-run capital accumulation. Three qualitatively different saving strategies are defined: 1. buffer stock saving (prudent and forward looking), 2. permanent income saving (forward looking without prudence), and 3. myopic saving (caring only about immediate consumption, and saving accidentally). In the model these types (that have subtypes depending on continuous parameters) may coexist, and we explore their respective survival chances by conducting simulations. It is found that prudent saving behavior becomes prevalent when the selection pressure is very high, but an economy comprising only prudent households tends to accumulate capital in excess of what is implied by the Golden Rule. As selecion pressure is reduced, myopic consumers appear, and under very low selection pressure the distribution of the main saver types becomes almost random. A seemingly puzzling fact emerges: the economy gets close to the Golden Rule of capital accumulation via endogenous selection of subtypes in a way that can be interpreted as "perverse exploitation", i.e. the exploitation of the rich by the poor. In other words, lowering the intensity of evolutionary forces, that results in more diversity in saver types, may be socially beneficial. Crickets may be useful for society as a whole, including prudent and cautious ants. |
| Keywords: | agent-based macromodel, bounded rationality, evolutionary learning, savings types |
| JEL: | C69 E21 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:has:discpr:1702&r=upt |
| By: | Wooders, John; Moreno, Diego |
| Abstract: | We study optimal public and secret reserve prices for risk averse sellers in second price auctions with endogenous entry. We show that an optimal public reserve price rP (observed by buyers prior to making their entry decisions) is above the seller's cost, c, whereas the secret reserve price rS (observed by buyers only upon entering the auction) is below the revenue maximizing reserve price r0. Thus, risk aversion raises public reserve prices, but lowers secret reserve prices. Further, we show that an optimal public reserve price is smaller than the secret reserve price (i.e., rP |
| Keywords: | Risk Aversion; Public and secret reserve prices; Endogenous entry; Second-price auctions |
| JEL: | D44 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:23951&r=upt |
| By: | Andrzej Ruszczynski; Jianing Yao |
| Abstract: | We propose a numerical recipe for risk evaluation defined by a backward stochastic differential equation. Using dual representation of the risk measure, we convert the risk valuation to a stochastic control problem where the control is a certain Radon-Nikodym derivative process. By exploring the maximum principle, we show that a piecewise-constant dual control provides a good approximation on a short interval. A dynamic programming algorithm extends the approximation to a finite time horizon. Finally, we illustrate the application of the procedure to risk management in conjunction with nested simulation. |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1701.06234&r=upt |
| By: | Cettolin, Elena (university tilburg); Tausch, Franziska (max planck institute for research on collective goods bonn) |
| Abstract: | Risk sharing arrangements diminish individuals’ vulnerability to probabilistic events that negatively affect their financial situation. This is because risk sharing implies redistribution, as lucky individuals support the unlucky ones. We hypothesize that responsibility for risky choices decreases individuals’ willingness to share risk by dampening redistribution motives, and investigate this conjecture with a laboratory experiment. Responsibility is created by allowing participants to choose between two different risky lotteries before they decide how much risk they share with a randomly matched partner. Risk sharing is then compared to a treatment where risk exposure is randomly assigned. We find that average risk sharing does not depend on whether individuals can control their risk exposure. However, we observe that when individuals are responsible for their risk exposure, risk sharing decisions are systematically conditioned on the risk exposure of the sharing partner, whereas this is not the case when risk exposure is random. |
| JEL: | D81 C91 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:unm:umagsb:2016018&r=upt |
| By: | Rokhaya Dieye; Bernard Fortin |
| Abstract: | This paper explores gender peer effects heterogeneity in adolescent Body Mass Index (BMI). We propose a utility-based non-cooperative social network model with effort technology. We allow the gender composition to influence peer effects. We analyze the possibility of recovering the fundamentals of our structural model from the best-response functions. We provide identification conditions of these functions generalizing those of the homogeneous version of the model. Extending Liu and Lee [2010], we consider 2SLS and GMM strategies to estimate our model using Add Health data. We provide tests of homophily in the formation of network and reject them after controlling for network (school) fixed effects. The joint (endogenous plus contextual) gender homogeneous model is rejected. However, we do not reject that the endogenous effects are the same.This suggests that the source of gender peer effects heterogeneity is the contextual effects. We find that peers’ age, parents’ education, health status, and race are relevant for the latter effects and are gender-dependent. |
| Keywords: | Obesity, Social Networks, Gender, Heterogeneity, Peer Effects, Identification, Add Health. |
| JEL: | L12 C31 Z13 D85 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:crrecr:1702&r=upt |