nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2017‒02‒05
24 papers chosen by

  1. Social Motives vs Social Influence: an Experiment on Time Preferences By Rodriguez-Lara, Ismael; Ponti, Giovanni
  2. Valuing Non-fatal Health Risks: Monetary and Health-Utility Measures By Hammitt, James
  3. Single stock call options as lottery tickets By Felix, Luiz; Kräussl, Roman; Stork, Philip
  4. Modelling the attraction of shopping centres By Kristoffersson, Ida; Daly, Andrew; Algers, Staffan
  5. Hammond\'s Equity Principle and the Measurement of Ordinal Inequalities By Nicolas GRAVEL; Brice MAGDALOU; Patrick MOYES
  6. Does mutual knowledge of preferences lead to more equilibrium play? Experimental evidence By Brunner, Christoph; Kauffeldt, T. Florian; Rau, Hannes
  7. Communication games with optional verification By Schopohl, Simon
  8. Motivation and Competition in Health Care By Anthony Scott; Peter Sivey
  9. Managing Inventory with Proportional Transaction Costs By Florent Gallien; Serge Kassibrakis; Semyon Malamud; Filippo Passerini
  10. Utility Rate Equations of Group Population Dynamics in Biological and Social Systems By Vyacheslav I. Yukalov; E.P. Yukalova; Didier Sornette
  11. Fine-Tuning Willingness-To-Pay Estimates in Second Price Auctions By Kassas, Bachir; Palma, Marco; Ness, Meghan; Anderson, David
  12. Games with a Permission Structure: a survey on generalizations and applications By René van den Brink
  13. Knight-Walras equilibria By Beißner, Patrick; Riedel, Frank
  14. On public good provision mechanisms with dominant strategies and balanced budget By Kuzmics, Christoph; Steg, Jan-Henrik
  15. Financial consulting: A qualitative study on its role in financial decision making By Sprenger, Julia
  16. The Role of Time Preferences in Educational Decision Making By Tolan, Songül; Kemptner, Daniel
  17. (Im)patience by Proxy: Making Intertemporal Decisions for Others By Angela C.M. de Oliveira; Sarah Jacobson
  18. Cognitive empathy in conflict situations By Gauer, Florian; Kuzmics, Christoph
  19. Prospect theory and the effects of bankruptcy laws on entrepreneurial aspirations By Saul Estrin; Tomasz Mickiewicz; Anna Rebmann
  20. Sources of Borrowing and Fiscal Multipliers By Priftis, Romanos; Zimic, Srecko
  21. The effect of the number of alternatives in a choice experiment with an application to the Macquarie Marshes, AU By Weng, Weizhe; Morrison, Mark; Boyle, Kevin; Boxall, Peter
  22. Behavioral Economics and the Atheoretical Style By Spiegler, Ran
  23. Disambiguation of Ellsberg equilibria in 2x2 normal form games By Decerf, Benoit; Riedel, Frank
  24. Entry and Competition in Takeover Auctions By Caleb Stroup; Matthew L. Gentry

  1. By: Rodriguez-Lara, Ismael; Ponti, Giovanni
    Abstract: We report experimental evidence on the effects of social preferences on intertemporal decisions. To this aim, we design an intertemporal Dictator Game to test whether Dictators modify their discounting behavior when their own decision is imposed on their matched Recipients. We run four different treatments to identify the effect of payoffs externalities from those related to information and beliefs. Our descriptive statistics show that heterogeneous social time preferences and information about others’ time preferences are significant determinants of choices: Dictators display a marked propensity to account for the intertemporal preferences of Recipients, both in the presence of externalities (social motives) and/or when they know about the decisions of their matched partners (social influence). We also perform a structural estimation exercise to control for heterogeneity in risk attitudes. As for individual behavior, our estimates confirm previous studies in that high risk aversion is associated with low discounting. As for social behavior, we find that social motives outweigh social influence, especially when we restrict our sample to pairs of Dictators and Recipients who satisfy minimal consistency conditions.
    Keywords: intertemporal choices, time preferences, risk and social preferences, social influence, beliefs (JEL: C91, D70, D81)
    JEL: C9 D70 D81
    Date: 2017–02–01
  2. By: Hammitt, James
    Abstract: Metrics for valuing environmental, health, and safety policies should be consistent with both the preferences of affected individuals and social preferences for distribution of health risks in the population. Two classes of metrics are widely used: monetary measures (e.g., willingness to pay) and health-utility measures (e.g., quality-adjusted life years (QALYs), disability-adjusted life years (DALYs)), both of which are summed across the population. Health-utility measures impose more structure than monetary measures, with the result that individuals’ preferences often appear inconsistent with these measures; for the same reason, health-utility measures help protect against cognitive errors and other sources of incoherence in valuation. This paper presents theoretical and empirical evidence comparing these metrics and examining how they co-vary.
    JEL: D6 L1 Q51
    Date: 2017–01
  3. By: Felix, Luiz; Kräussl, Roman; Stork, Philip
    Abstract: This paper investigates whether the overpricing of out-of-the money single stock calls can be explained by Tversky and Kahneman's (1992) cumulative prospect theory (CPT). We argue that these options are overpriced because investors overweight small probability events and overpay for such positively skewed securities, i.e., characteristics of lottery tickets. We match a set of subjective density functions derived from risk-neutral densities, including CPT with the empirical probability distribution of U.S. equity returns. We find that overweighting of small probabilities embedded in CPT explains on average the richness of out-of-the money single stock calls better than other utility functions. The degree that agents overweight small probability events is, however, strongly timevarying and has a horizon effect, which implies that it is less pronounced in options of longer maturity. We also find that time-variation in overweighting of small probabilities is strongly explained by market sentiment, as in Baker and Wurgler (2006).
    Keywords: Cumulative prospect theory,Market sentiment,Risk-neutral densities,Call options
    JEL: G02 G12
    Date: 2017
  4. By: Kristoffersson, Ida (VTI); Daly, Andrew (Institute for Transport Studies, University of Leeds); Algers, Staffan (KTH)
    Abstract: Development of major shopping centres continues even though online shopping is increasing. This has implications for mode and destination choice for shopping travel and therefore also for sustainability. In this paper, we estimate models for shopping travel using an unusually rich data set of shopping attractions. We find that shopping travel is best represented in three separate models: consumables in short and long-activity segments and durables. In all of these models, we show that representing nearby attractions outside the destination zone adds to the measured attraction. For both consumables segments, the addition of secondary attractions within 2 km of the main destination adds very significantly to the explanation given by the model, but attractions within 5 km do not add anything. For durables, both 2 km and 5 km added to the model, but 2 km was slightly better. Furthermore, we find significant within-zone correlation in all three models, but are unable to find significant between-zone correlation, indicating that zone boundaries have some behavioural meaning for shopping travellers, but larger areas are not viewed in this way. Shopping attractions with a specifically Swedish impact, Systembolaget (official alcohol outlet in Sweden) and IKEA, proved to be important in all the models. These attractors work better as part of the size than as part of the utility, indicating that they appear to be separate attractors of trips, rather than as adding to the utility of other attractors.
    Keywords: Shopping travel behaviour; Large-scale modelling; Travel attractions;
    JEL: R12 R14 R15 R41 R42 R48
    Date: 2017–01–30
  5. By: Nicolas GRAVEL; Brice MAGDALOU; Patrick MOYES
    Abstract: What would be the analogue of the Lorenz quasi-ordering when the variable of interest is of a purely ordinal nature? We argue that it is possible to derive such a criterion by substituting for the Pigou-Dalton transfer used in the standard inequality literature what we refer to as a Hammond progressive transfer. According to this criterion, one distribution of utilities is considered to be less unequal than another if it is judged better by both the lexicographic extensions of the maximin and the minimax, henceforth referred to as the leximin and the antileximax, respectively. If one imposes in addition that an increase in someone\'s utility makes the society better off, then one is left with the leximin, while the requirement that society welfare increases as the result of a decrease of one person\'s utility results in the antileximax criterion. Incidently, the paper provides an alternative and simple characterisation of the leximin principle widely used in the social choice and welfare literature.
    Keywords: Ordinal inequality, Hammond equity principle, Leximin, Antileximax.
    JEL: D30 D63
    Date: 2017
  6. By: Brunner, Christoph; Kauffeldt, T. Florian; Rau, Hannes
    Abstract: In many experiments, the Nash equilibrium concept seems not to predict well. One reason may be that players have non-selfish preferences over outcomes. As a consequence, even when they are told what the material payoffs of the game are, mutual knowledge of preferences may not be satisfied. We experimentally examine several 2x2 games and test whether revealing players' preferences leads to more equilibrium play. For that purpose, we elicit subjects' preferences over outcomes before the games are played. It turns out that subjects are significantly more likely to play an equilibrium strategy when other players' preferences are revealed. We discuss a noisy version of the Bayesian Nash equilibrium and a model of strategic ambiguity to account for observed subject behavior.
    Keywords: Behavioral Game Theory; Epistemic Game Theory; Nash Equilibrium; Games of Incomplete Information
    Date: 2017–01–30
  7. By: Schopohl, Simon (Center for Mathematical Economics, Bielefeld University)
    Abstract: We consider a Sender-Receiver game in which the Sender can choose between sending a cheap-talk message, which is costless, but also not verified and a costly verified message. While the Sender knows the true state of the world, the Receiver does not have this information, but has to choose an action depending on the message he receives. The action then yields to some utility for Sender and Receiver. We only make a few assumptions about the utility functions of both players, so situations may arise where the Sender’s preferences are such that she sends a message trying to convince the Receiver about a certain state of the world, which is not the true one. In a finite setting we state conditions for full revelation, i.e. when the Receiver always learns the truth. Furthermore we describe the player’s behavior if only partial revelation is possible. For a continuous setting we show that additional conditions have to hold and that these do not hold for "smooth" preferences and utility, e.g. in the classic example of quadratic loss utilities.
    Keywords: cheap-talk, communication, costly disclosure, full revelation, increasing differences, Sender-Receiver game, verifiable information
    Date: 2016–12–23
  8. By: Anthony Scott (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Peter Sivey (School of Economics, Finance and Marketing, RMIT University)
    Abstract: Non-pecuniary sources of motivation are a strong feature of the health care sector and the impact of competitive incentives may be lower where pecuniary motivation is low. We test this hypothesis by measuring the marginal utility of income of physicians from a stated-choice experiment, and examining whether this measure influences the response of physicians to changes in competition on prices charged. We find that physicians exploit a lack of competition with higher prices only if they have a high marginal utility of income.
    Keywords: FDoctors, incentives, competition, motivation
    JEL: I11
    Date: 2017–01
  9. By: Florent Gallien (Swissquote Bank); Serge Kassibrakis (Swissquote Bank); Semyon Malamud (Ecole Polytechnique Fédérale de Lausanne, Swiss Finance Institute, and Centre for Economic Policy Research (CEPR)); Filippo Passerini (Swissquote Bank)
    Abstract: We solve the problem of optimal inventory management for a CARA market-maker who faces proportional transaction costs and marking to market. Our explicit solution accommodates inventory shocks following an arbitrary compound Poisson process, and allows us to explicitly link the optimal policy to the moment-generating function of the shock distribution. We show that the no-trade region is always wider in the presence of shocks, increases with the order imbalance, and usually decreases with the markups charged by the market-maker. We use our explicit solution to derive several comparative statics results and calibrate our solution to inventory data of Forex clients of a bank. Our findings suggest that optimal accounting for inventory shocks leads to significant utility gains.
    Keywords: Inventory Management, Market Making, Transaction Costs
    JEL: G24 G32 G11 D92 C61
  10. By: Vyacheslav I. Yukalov (Joint Institute for Nuclear Research and ETH Zurich); E.P. Yukalova (Joint Institute for Nuclear Research); Didier Sornette (Swiss Finance Institute and ETH Zürich)
    Abstract: We present a novel system of equations to describe the evolution of self-organized structured societies (biological or human) composed of several trait groups. The suggested approach is based on the combination of ideas employed in the theory of biological populations, system theory, and utility theory. The evolution equations are defined as utility rate equations, whose parameters are characterized by the utility of each group with respect to the society as a whole and by the mutual utilities of groups with respect to each other. We analyze in detail the cases of two groups (cooperators and defectors) and of three groups (cooperators, defectors, and regulators) and find that, in a self-organized society, neither defectors nor regulators can overpass the maximal fractions of about $10\%$ each. This is in agreement with the data for bee and ant colonies. The classification of societies by their distance from equilibrium is proposed. We apply the formalism to rank the countries according to the introduced metric quantifying their relative stability, which depends on the cost of defectors and regulators as well as their respective population fractions. We find a remarkable concordance with more standard economic ranking based, for instance, on GDP per capita.
    Keywords: trait groups, cooperators, defectors, regulators, evolution equations, evolutionally stable strategies, self-organized societies
    JEL: C30 C79 H59
  11. By: Kassas, Bachir; Palma, Marco; Ness, Meghan; Anderson, David
    Abstract: It is well documented that people overbid in second price auctions (SPAs). Yet, this fact is conveniently ignored when eliciting willingness-to-pay (WTP) for market goods. We propose a simple design that not only tests the external validity of SPA bids, but also suggests a more accurate method of eliciting WTP in SPAs. Following the SPA, participants were offered a randomly chosen price, from the range of retail prices in actual markets, at which they can purchase any amount of the good in an onsite secondary market. The design links overbidding and underbidding behavior to violations of the weak axiom of revealed preferences (WARP). We find robust evidence that the dominance of overbidding over underbidding in SPAs leads to an upward bias in the WTP estimates. While this can compromise market good valuations by inflating the perceived value of products, our design enables utilization of Kotlarski’s identity to recover the distribution of the unobserved true valuations.
    Keywords: Overbidding, WARP, WTP, Kotlarski’s identity, non-parametric estimation, Agricultural and Food Policy, Consumer/Household Economics, Demand and Price Analysis, Institutional and Behavioral Economics, D44,
    Date: 2017
  12. By: René van den Brink (Department of Econometrics and OR, VU University and Tinbergen Institute Amsterdam, The Netherlands)
    Abstract: In the field of cooperative games with restricted cooperation, various restrictions on coalition formation are studied. The most studied restrictions are those that arise from restricted communication and hierarchies. This survey discusses several models of hierarchy restrictions and their relation with communication restrictions. In the literature, there are results on game properties, Harsanyi dividends, core stability, and various solutions that generalize exisiting solutions for TU-games. In this survey we mainly focus on axiomatizations of the Shapley value in different models of games with a hierarchically structured player set, and their applications. Not only do these axiomatizations provide insight in the Shapley value for these models, but also by considering the types of axioms that characterize the Shapley value, we learn more about different network structures. A central model of games with hierarchies are the games with a permission structure where players in a cooperative transferable utility game are part of a permission structure in the sense that there are players that need permission from other players before they are allowed to cooperate. This permission structure is represented by a directed graph. Generalizations of this model are, for example, games on antimatroids, and games with a local permission structure. Besides discussing these generalizations, we briefly discuss some applications, in particular auction games and hierarchically structured firms.
    Keywords: Cooperative TU-game; hierarchy; permission structure; antimatroid; local permission structure; applications.
    JEL: C71
    Date: 2017–01–30
  13. By: Beißner, Patrick (Center for Mathematical Economics, Bielefeld University); Riedel, Frank (Center for Mathematical Economics, Bielefeld University)
    Abstract: Knightian uncertainty leads naturally to nonlinear expectations. We introduce a corresponding equilibrium concept with sublinear prices and establish their existence. In general, such equilibria lead to Pareto inefficiency and coincide with Arrow-Debreu equilibria only if the values of net trades are ambiguity-free in the mean. Without aggregate uncertainty, inefficiencies arise generically. We introduce a constrained efficiency concept, uncertainty-neutral efficiency and show that Knight-Walras equilibrium allocations are efficient in this constrained sense. Arrow-Debreu equilibria turn out to be non-robust with respect to the introduction of Knightian uncertainty.
    Keywords: Knightian Uncertainty, Ambiguity, General Equilibrium
    Date: 2016–05–30
  14. By: Kuzmics, Christoph (Center for Mathematical Economics, Bielefeld University); Steg, Jan-Henrik (Center for Mathematical Economics, Bielefeld University)
    Abstract: Consider a mechanism for the binary public good provision problem that is dominant strategy incentive compatible (DSIC), ex-post individually rational (EPIR), and ex-post budget balanced (EPBB). Suppose this mechanism has the additional property that the utility from participating in the mechanism to the lowest types is zero for all agents. Such a mechanism must be of a threshold form, in which there is a fixed threshold for each agent such that the public good is not provided if there is an agent with a value below her threshold and is provided if all agents’ values exceed their respective threshold. There are mechanism that are DSIC, EPIR, and EPBB that are not of the threshold form. Mechanisms that maximize welfare subject to DSIC, EPIR, and EPBB must again have the threshold form. Finally, mechanisms that are DSIC, EPIR, EPBB and that furthermore satisfy the condition that there is at least one type profile in which all agents can block the provision of the public good, also must be of the threshold form. As we allow individuals’ values for the public good to be negative and positive, our results cover examples including bilateral trade, bilateral wage negotiations, a seller selling to a group of individuals (who then have joint ownership rights), and rezoning the use of land.
    Keywords: Public good provision, asymmetric information, dominant strategy
    Date: 2016–03–02
  15. By: Sprenger, Julia
    Abstract: The current study examines the way people deal with financial decisions. The purpose of this study is to explore the role of financial consulting in the decision making process and the complex decision dynamics in the run up to a decision. Data for this study were collected through a series of semi-structured interviews with both financial consultants of a savings bank and their clients. The findings provide insights into different attitudes towards financial decision making, locate financial consulting within the decision process, and compare the information habits and the degree to which decision autonomy is maintained, restricted, or given up across different types of clients. Besides, the study shows how trust between client and consultant encourages reciprocal behavior and increases the willingness to accept opportunity costs. The paper discusses these findings with respect to consulting practices and consumer policy and outlines directions for future research.
    Keywords: financial decision making,financial consulting,interviews,decision autonomy,information
    JEL: D14 D18 D83 G21
    Date: 2017
  16. By: Tolan, Songül; Kemptner, Daniel
    Abstract: We analyze the relevance of time-inconsistent preferences in educational decision making and corresponding policies within a structural dynamic choice model. Using a novel identification approach based on exclusion restrictions, we exploit the variation in average years invested in degree attainment through various educational reforms to identify the discount factor of a decision maker with hyperbolic time preferences. We make two important research contributions. First, we estimate our model using data from the German Socioeconomic Panel (soep) and provide quantitative evidence for time-inconsistent behavior in educational decision making. Second, we evaluate the relevance of time-inconsistent behavior for the effectiveness of education policies. For this purpose, we simulate policies where time preferences may play an important role: (1) an increase in the state grant for students (BaföG) as a way to affect short-run costs while at school and (2) an increase in the state grant as a loan which will have to be payed back five years after the end of the education.
    JEL: C61 D91 I21
    Date: 2016
  17. By: Angela C.M. de Oliveira (University of Massachusetts-Amherst); Sarah Jacobson (Williams College)
    Abstract: Decisions with consequences that play out over time are ubiquitous in business, policy, and family relations, and frequently the agent making these decisions is distinct from those who bear the consequences. We use a lab experiment to examine whether individuals make different intertemporal decisions for others of varying social distance than for themselves. Subjects make a series of intertemporal work time allocation decisions for themselves and for another individual, either a friend or a stranger. We find that people who receive no information about their recipient’s preferences choose more impatiently (moving a disutility cost into the future) for others than for themselves. In other words, a decision made for you by proxy is more impatient than a decision you would make for yourself and thus is probably suboptimal. This result contrasts with the literature, and this may be because, as we find from a separate survey, people perceive procrastination of tasks as qualitatively different from other discounting decisions. Survey evidence suggests that individuals believe that they are more patient than the other subjects are, suggesting that these too-impatient decisions are made for others out of benevolence with a mistaken belief. Further, when the decision-maker is given information about the recipient’s own-stated preferences, this bias of excessively impatient decisions, particularly when the recipient is a friend. Taken together, our results imply that given limited information, proxy decision-makers choose more impatiently (pushing more costs into the future) than agents would prefer, but information mitigates this error.
    Keywords: proxy decision-making, intertemporal choice, laboratory experiment
    JEL: D03 D90 D64 C91
    Date: 2017–01
  18. By: Gauer, Florian (Center for Mathematical Economics, Bielefeld University); Kuzmics, Christoph (Center for Mathematical Economics, Bielefeld University)
    Abstract: Two individuals are involved in a conflict situation in which preferences are ex ante uncertain. While they eventually learn their own preferences, they have to pay a small cost if they want to learn their opponent’s preferences. We show that, for sufficiently small positive costs of information acquisition, in any Bayesian Nash equilibrium of the resulting game of incomplete information the probability of getting informed about the opponent’s preferences is bounded away from zero and one.
    Keywords: Incomplete Information, Information Acquisition, Theory of Mind, Conflict, Imperfect Empathy
    Date: 2016–01–15
  19. By: Saul Estrin; Tomasz Mickiewicz; Anna Rebmann
    Abstract: We apply prospect theory to explain how personal and corporate bankruptcy laws affect risk perceptions of entrepreneurs at time of entry and therefore their growth ambitions. Previous theories have reached ambiguous conclusions as to whether countries with more debtor-friendly bankruptcy laws (i.e. laws that are more forgiving towards debtors in bankruptcy proceedings) are likely to have more entrepreneurs, or whether, creditor-friendly regimes have positive effects on new ventures via enhanced incentives for the supply of credit to entrepreneurs. Responding to this ambiguity, we apply prospect theory to propose that entrepreneurs do not attach the same significance to different elements of bankruptcy codes—and to explain which aspects of debtor-friendly bankruptcy laws matter more to entrepreneurs. Based on this, we derive and confirm hypotheses about the impact of aspects of bankruptcy codes on entrepreneurial activity using the Global Entrepreneurship Monitor combined with data on both personal and corporate bankruptcy regulations for 15 developed OECD countries. We use multilevel random coefficient logistic regressions to take account of the hierarchical nature of the data (country and individual levels). Because entrepreneurs and creditors are sensitive to different elements of the codes, there is scope for optimisation of the legal design of bankruptcy law to achieve both an adequate supply of credit and to encourage high-ambition entrepreneurship.
    Keywords: Entrepreneurship;High-aspiration entrepreneurship; Bankruptcy; Global entrepreneurship monitor
    JEL: K22
    Date: 2016
  20. By: Priftis, Romanos; Zimic, Srecko
    Abstract: We find that debt-financed government spending multipliers vary considerably depending on the location of the debt holder. In a sample of 59 countries we find that government spending multipliers are larger when government purchases are financed by issuing debt to foreign investors (non-residents), compared to the case when government purchases are financed by issuing debt to home investors (residents). In a theoretical model we show that the location of the government debt holder produces these differential responses through the extent that private investment is crowded out in each case. Increasing international capital mobility of the resident private sector decreases the difference between the two types of financing, a prediction, which is also confirmed by the data. The share of rule-of-thumb workers, as well as the strength of the public good in the utility function play a key role in generating model-based fiscal multipliers, which are quantitatively comparable with those of the data.
    Keywords: Debt financing, Fiscal multipliers, Government spending, Magnitude restrictions, Small open economy
    JEL: E2 F41 G15 H6
    Date: 2017
  21. By: Weng, Weizhe; Morrison, Mark; Boyle, Kevin; Boxall, Peter
    Keywords: Non-market valuation, Stated preferences, Choice Experiments, Incentive Compatibility, Status-quo option, Task complexity, Environmental Economics and Policy, Q51, Q57, Q48,
    Date: 2017
  22. By: Spiegler, Ran
    Abstract: Behavioral economics is perceived by many to be part of a general shift in the culture of economics toward a less theoretical style. I present a critical discussion of certain manifestations of this trend: a preference for an anecdotal style of exposition (illustrated by Akerlof and Shiller's Phishing for Phools), reduced-form modeling (illustrated by Campbell's Ely Lecture), and the method of capturing psychological forces using parametric modifications of conventional functional forms. I argue that the subject of "psychology and economics" is intrinsically foundational, and that a pure-theory component is essential for it to realize its transformative potential.
    JEL: D03
    Date: 2017–01
  23. By: Decerf, Benoit (Center for Mathematical Economics, Bielefeld University); Riedel, Frank (Center for Mathematical Economics, Bielefeld University)
    Abstract: Riedel and Sass (2013) study complete information normal form games in which ambiguity averse players use ambiguous randomization strategies, in addition to pure and mixed strategies. The solution concept they propose, the Ellsberg equilibrium, is a coarsening of the classical Nash equilibrium. We provide a foundation of the new equilibrium concept in the spirit of Harsanyi. We prove an extension of the Purification Theorem for 2x2 normal form games. Our result implies that any Ellsberg equilibrium of such game is the limit case of a mixed strategy equilibrium in a disturbed version of the game for which payoffs are ambiguously disturbed.
    Keywords: Knightian uncertainty, Ellsberg games, Ambiguity aversion, Purification, Disambiguation
    Date: 2016–03–03
  24. By: Caleb Stroup (Department of Economics, Davidson College); Matthew L. Gentry (Department of Economics, London School of Economics and Political Science)
    Abstract: We show that in many cases target shareholders would obtain higher prices if their company were sold via a negotiation, rather than via an auction. We show that fewer than half of invited potential bidders participate in takeover auctions. Endogenous participation is thus an important feature of takeover auction markets. Accounting for the endogenous determination of the size and composition of the bidder pool, we show that possible bidders in takeover auctions face substantial uncertainty prior to their entry into an auction, but that this uncertainty encourages participation in competitive bidding, thus making auctions preferable when uncertainty is high. In negotiations, uncertainty reduces the effectiveness of upward bid-shading to deter potential competitors, so negotiations are preferable when uncertainty is low. Cross-sectional averages thus mask dramatic variation in the best way to sell a company, but over 40 percent of this variation is accounted for by pre-entry uncertainty and the costs of overcoming it. Our results call into question claims that target directors necessarily violate their fiduciary duty by selling a company via a negotiated transaction, even in the absence of a formal market check.
    Keywords: Takeover Auctions, Mergers and Acquisitions
    JEL: D44
    Date: 2017–01

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