|
on Utility Models and Prospect Theory |
|
Issue of 2017‒02‒12
thirty papers chosen by |
| By: | Özgür Evren (New Economic School) |
| Abstract: | I study ambiguity attitudes in Uzi Segal's recursive non-expected utility model. I show that according to this model, the negative certainty independence axiom over simple lotteries is equivalent to a robust, or global form of ambiguity aversion that requires ambiguity averse behavior irrespective of the number of states and the decision maker's second-order belief. Thus, the recursive cautious expected utility model is the only subclass of Segal's model that robustly predicts ambiguity aversion. Similarly, the independence axiom over lotteries is equivalent to a robust form of ambiguity neutrality. In fact, any non-expected utility preference over lotteries coupled with a suitable second-order belief over three states produces either the Ellsberg paradox or the opposite mode of behavior. Finally, I propose a definition of a mean-preserving spread for second-order beliefs that is equivalent to increasing ambiguity aversion for every recursive preference that satisfies the negative certainty independence axiom. |
| Keywords: | Ambiguity Aversion, Ellsberg Paradox, Allais Paradox, Negative Certainty Independence, Reduction of Compound Lotteries, Increasing Second-Order Uncertainty |
| JEL: | D81 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:cfr:cefirw:w0236&r=upt |
| By: | Glenn W. Harrison; J. Todd Swarthout |
| Abstract: | We take Cumulative Prospect Theory (CPT) seriously by rigorously estimating structural models using the full set of CPT parameters. Much of the literature only estimates a subset of CPT parameters, or more simply assume CPT parameter values from prior studies. Our data are from substantial laboratory experiments with undergraduate students and MBA students facing real incentives and losses. We also estimate structural models from Expected Utility Theory, Dual Theory, Rank-Dependent Utility (RDU) and Disappointment Aversion for comparison. Our major finding is that a majority of individuals in our sample locally asset integrate. That is, they see a loss frame for what it is, a frame, and behave as if they evaluate the net payment rather than the gross loss when one is presented to them. This finding is devastating to the direct application of CPT to these data for those subjects. Support for CPT is greater when losses are covered out of an earned endowment rather than house money, but RDU is still the best single characterization of individual and pooled choices. Defenders of the CPT model claim, correctly, that the CPT model exists “because the data says it should.” In other words, the CPT model was borne from a wide range of stylized facts culled from parts of the cognitive psychology literature. If one is to take the CPT model seriously and rigorously then it needs to do a much better job of explaining the data than we see here. |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:exc:wpaper:2016-04&r=upt |
| By: | Philipp Renner (Stanford University); Karl Schmedders (University of Zurich) |
| Abstract: | This paper presents a new method for the analysis of moral hazard principal-agent problems. The new approach avoids the stringent assumptions on the distribution of outcomes made by the classical first-order approach and instead only requires the agent's expected utility to be a rational function of the action. This assumption allows for a reformulation of the agent's utility maximization problem as an equivalent system of equations and inequalities. This reformulation in turn transforms the principal's utility maximization problem into a nonlinear program. Under the additional assumptions that the principal's expected utility is a polynomial and the agent's expected utility is rational in the wage, the final nonlinear program can be solved to global optimality. The paper also shows how to first approximate expected utility functions that are not rational by polynomials, so that the polynomial optimization approach can be applied to compute an approximate solution to non-polynomial problems. Finally, the paper demonstrates that the polynomial optimization approach extends to principal-agent models with multi-dimensional action sets. |
| Keywords: | Principal-agent model, moral hazard, first order approach, polynomials |
| JEL: | C63 D80 D82 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1235&r=upt |
| By: | Miklos Rasonyi |
| Abstract: | We treat utility maximization from terminal wealth for an agent dynamically investing in a continuous-time financial market and receiving a possibly unbounded random endowment. The utility function is assumed finite on the whole real line. We prove the existence of an optimal investment without introducing the associated dual problem in the case where the utility has a "moderate" tail at $-\infty$. We rely on a recent Koml\'os-type lemma of Delbaen and Owari which leads to a simple and transparent proof. Our results apply to non-smooth utilities and even global strict concavity can be relaxed so we can accommodate, in particular, the problem of minimizing expected loss for a wide class of loss functions. We can handle certain random endowments with non-hedgeable risks, complementing earlier papers. Constraints on the terminal wealth can also be incorporated. As examples, we treat the cases of frictionless markets with finitely many assets, markets with proportional transaction costs and large financial markets comprising a countably infinite number of assets. |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1702.00982&r=upt |
| By: | Fosgerau, Mogens; Melo, Emerson; Shum, Matt |
| Abstract: | This paper establishes a general equivalence between discrete choice and rational inattention models. We show that the choice probabilities emerging from any random utility discrete choice model can be obtained from a class of suitably generalized rational inattention models, and vice versa. Thus any discrete choice model can be given an interpretation in terms of boundedly rational behavior. The underlying idea is that the surplus function of a discrete choice model has a convex conjugate that is a generalized entropy (which is a suitable generalization of the Shannon entropy function). These generalized entropies are used to construct an information cost function for a generalized rational inattention model. We denote this class of rational inattention problems as Generalized Entropic Rational Inattention (GERI) models. |
| Keywords: | Rational Inattention; discrete choices; general entropy; con- vex analysis |
| JEL: | C25 D03 D81 E03 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:76605&r=upt |
| By: | Antoine Bommier (ETH Zurich, Chair for Integrative Risk Management and Economics, Switzerland.); Bruno Lanz (University of Neuchâtel, Department of Economics and Business, Switzerland.) |
| Abstract: | We develop a simple theoretical framework that identifies time preferences without relying on a particular utility function. Our empirical strategy requires observations about intertemporal consumption allocation decisions made under varying relative prices, and seeks to approximate the marginal rate of substitution of consumption at different dates along a constant consumption path. Doing so, we emphasize the importance of measuring the curvature of the intertemporal utility function (or willingness to substitute consumption across time). We illustrate our approach with data derived from the convex time budget procedure of Andreoni and Sprenger (AER, 2012). |
| Keywords: | Intertemporal choice; Discounting behavior; Intertemporal substitution; Discounted utility model; Convex budgets |
| JEL: | D03 D12 D91 E61 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:irn:wpaper:17-02&r=upt |
| By: | Christophe Courbage (University of Applied Sciences of Western Switzerland); Henri Loubergé (University of Geneva and Swiss Finance Institute); Béatrice Rey (University of Lyon 2) |
| Abstract: | This paper investigates how welfare losses for facing risks change as a function of the number of risk exposures. To that aim, we define the risk apportionment of order n (RA-n) utility premium as a measure of pain associated with facing the passage from one risk to a riskier one. Changes in risks are expressed through the specific concept of stochastic dominance of order n defined by Ekern (1980). Three confiurations of risk exposures are considered. The paper first shows how the RA-n utility premium is modified when individual's wealth becomes riskier. This makes it possible to generalise earlier results on the topic. Second, the paper provides necessary and sufficient conditions on individual preferences for superadditivity and subadditivity of the RA-n utility premium. Third, the paper investigates welfare changes of merging increases in risks. |
| Keywords: | risk apportionment, superadditivity, RA-n utility premium |
| JEL: | D81 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1677&r=upt |
| By: | Daniel Muller |
| Abstract: | This paper dissects distributional preferences with group identity in a modified dictator game. I estimate individual-level utility functions with two parameters that govern the trade- offs between equity and efficiency and giving to self and to other. Subjects put on average less weight on income of the out-group, but overall only a minority behaves completely selfishly. Giving to the out-group also renders subjects more accepting of inequality. However, the experiment also uncovers a large heterogeneity of preferences. It seems that those who are social become slightly less social in the presence of the out-group. The number of selfish individuals is instead hardly affected. Moreover, choices in both treatments overwhelmingly stem from well-behaved, yet systematically different underlying social preference functionals. Hence this experiment suggests that the rational choice approach, which is predominantly used in the literature, is a useful tool to understand the effect of group identity on social preferences. Interestingly, I also find that the weight on self, but not the individual equity-efficiency trade-off, predicts political left-right self-assessment as more conservative voters are more selfish. I also document gender differences: females put less weight on self, are more inequality averse and react more strongly to the treatment. |
| Keywords: | Social identity, GARP, distributional preferences |
| JEL: | D30 D63 H50 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2017-02&r=upt |
| By: | Nina Anchugina |
| Abstract: | Bell (1988) introduced the one-switch property for preferences over sequences of dated outcomes. This property concerns the effect of adding a common delay to two such sequences: it says that the preference ranking of the delayed sequences is either independent of the delay, or else there is a unique delay such that one strict ranking prevails for shorter delays and the opposite strict ranking for longer delays. For preferences that have a discounted utility (DU) representation, Bell (1988) argues that the only discount functions consistent with the one-switch property are sums of exponentials. This paper proves that discount functions of the linear times exponential form also satisfy the one-switch property. We further demonstrate that preferences which have a DU representation with a linear times exponential discount function exhibit increasing impatience (Takeuchi (2011)). We also clarify an ambiguity in the original Bell (1988) definition of the one-switch property by distinguishing a weak one-switch property from the (strong) one-switch property. We show that the one-switch property and the weak one-switch property definitions are equivalent in a continuous-time version of the Anscombe and Aumann (1963) setting. |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1702.02254&r=upt |
| By: | Jan Kallsen (Munich University of Technology); Johannes Muhle-Karbe (University of Michigan at Ann Arbor) |
| Abstract: | An investor with constant absolute risk aversion trades a risky asset with general Itôdynamics, in the presence of small proportional transaction costs. In this setting, we formally derive a leading-order optimal trading policy and the associated welfare, expressed in terms of the local dynamics of the frictionless optimizer. By applying these results in the presence of a random endowment, we obtain asymptotic formulas for utility indifference prices and hedging strategies in the presence of small transaction costs. |
| Keywords: | transaction costs, indifference pricing and hedging, exponential utility, asymptotics |
| JEL: | G13 G11 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1230&r=upt |
| By: | Halil Mete Soner (ETH Zürich, Ecole Polytechnique Fédérale de Lausanne, and Swiss Finance Institute); Nizar Touzi (Ecole Polytechnique, Paris) |
| Abstract: | We consider the classical Merton problem of lifetime consumption-portfolio optimization problem with small proportional transaction costs. The first order term in the asymptotic expansion is explicitly calculated through a singular ergodic control problem which can be solved in closed form in the one-dimensional case. Unlike the existing literature, we consider a general utility function and general dynamics for the underlying assets. Our arguments are based on ideas from the homogenization theory and use the convergence tools from the theory of viscosity solutions. The multidimensional case is studied in our accompanying paper using the same approach. |
| Keywords: | transaction costs, homogenization, viscosity solutions, asymptotic expansions |
| JEL: | D40 G11 G12 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1213&r=upt |
| By: | Biener, Christian; Landmann, Andreas; Santana, Maria Isabel |
| Abstract: | Insurance contracts may fail to perform, leading to a total or partial default on valid claims. We extend models of such probabilistic insurance to allow for ambiguity in contract nonperformance risk, and to derive formally that mean-preserving ambiguity reduces demand. The results of a field lab experiment are consistent with this logic. In particular, we find that a 10 percent contract non-performance risk reduces insurance demand by 17.1 percentage points even when premiums are adjusted accordingly. Ambiguity about this contract nonperformance probability further decreases demand by 14.5 percentage points. While the demand-reducing effect of ambiguity is more pronounced for high-numeracy and ambiguity-averse individuals, it appears to be little affected by experience. The cause of an insurance contract failing to perform does not significantly influence the strength of these effects, but independently affects demand of lownumeracy and ambiguity-averse individuals. |
| JEL: | D03 D81 D83 G22 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:usg:sfwpfi:2017:01&r=upt |
| By: | Parkpoom Pichhannaronk; Apichart Daloonpate; Santi Sanglestsawai Author-Email : - (Department of Agricultural and Resource Economics,Faculty of Economics,Kasetsart University,Thailand) |
| Abstract: | This paper aimed to evaluate farmers’ preferences on condition attributes in a manufacturing pineapple sale contract. Data were collected from 300 pineapple farmers in Rayong province in the cropping season 2015 using paper-based questionnaires. Conjoint analysis model was employed to analyze the attribute ranking. Consequently, farmers were grouped by using cluster analysis in order to study attribute ranking for each group. The analytical results revealed that farmers’ preferences were affected respectively by coverage-crop insurance option, price option, contract quantity and input supply arrangement. Finally, the attribute set that was found to obtain the highest total utility included guaranteed minimum prices, total quantity purchase and partial coverage-crop insurance. The farmers were segmented in 2 groups due to their preferences. The first group of farmers mostly had their planted areas between 20-40 rais and attended at least one training program concerning agricultural knowledge. The most important attribute of the first group was coverage-crop insurance option. Most of the second-group farmers had a small area planted and never attended the training. The price option was the most importance attribute for the second group. The suggestion from this study was that farmers, pineapple manufacturers and related government sectors jointly set a reasonably minimum guaranteed price that is consistent to the cost of production. Moreover, coverage-crop insurance could be added in a manufacturing pineapple sale contact in order to increase the farmers' confidence in their production. |
| Keywords: | Farmers’ preferences, Manufacturing Pineapple, Conjoint Analysis |
| JEL: | Q10 Q13 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:kau:wpaper:201701&r=upt |
| By: | Romuald Elie; Ludovic Moreau; Dylan Possama\"i |
| Abstract: | This paper studies a class of non-Markovian singular stochastic control problems, for which we provide a novel probabilistic representation. The solution of such control problem is proved to identify with the solution of a Z-constrained BSDE, with dynamics associated to a non singular underlying forward process. Due to the non-Markovian environment, our main argumentation relies on the use of comparison arguments for path dependent PDEs. Our representation allows in particular to quantify the regularity of the solution to the singular stochastic control problem in terms of the space and time initial data. Our framework also extends to the consideration of degenerate diffusions, leading to the representation of the solution as the infimum of solutions to Z-constrained BSDEs. As an application, we study the utility maximization problem with transaction costs for non-Markovian dynamics. |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1701.08861&r=upt |
| By: | Masaaki Fukasawa; Mitja Stadje |
| Abstract: | We model a nonlinear price curve quoted in a market as the utility indifference curve of a representative liquidity supplier. As the utility function we adopt a g-expectation. In contrast to the standard framework of financial engineering, a trader is no more price taker as any trade has a permanent market impact via an effect to the supplier's inventory. The P&L of a trading strategy is written as a nonlinear stochastic integral. Under this market impact model, we introduce a completeness condition under which any derivative can be perfectly replicated by a dynamic trading strategy. In the special case of a Markovian setting the corresponding pricing and hedging can be done by solving a semi-linear PDE. |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1702.01385&r=upt |
| By: | Kasper Larsen; Halil Mete Soner; Gordan \v{Z}itkovi\'c |
| Abstract: | We introduce the notion of a conditional Davis price and study its properties. Our ultimate goal is to use utility theory to price non-replicable contingent claims in the case when the investor's portfolio already contains a non-replicable component. We show that even in the simplest of settings - such as Samuelson's model - conditional Davis prices are typically not unique and form a non-trivial subinterval of the set of all no-arbitrage prices. Our main result characterizes this set and provides simple conditions under which its two endpoints can be effectively computed. We illustrate the theory with several examples. |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1702.02087&r=upt |
| By: | James C. Cox; John A. List; Michael Price; Vjollca Sadiraj; Anya Samek |
| Abstract: | The literature exploring other regarding behavior sheds important light on interesting social phenomena, yet less attention has been given to how the received results speak to foundational assumptions within economics. Our study synthesizes the empirical evidence, showing that recent work challenges convex preference theory but is largely consistent with rational choice theory. Guided by this understanding, we design a new, more demanding test of a central tenet of economics—the contraction axiom—within a sharing framework. Making use of more than 325 dictators participating in a series of allocation games, we show that sharing choices violate the contraction axiom. We advance a new theory that augments standard models with moral reference points to explain our experimental data. Our theory also organizes the broader sharing patterns in the received literature. |
| Keywords: | experiment, giving, taking, altruism, moral cost |
| JEL: | C93 D03 D64 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:exc:wpaper:2016-02&r=upt |
| By: | Arni, Patrick; Liu, Xingfei |
| Abstract: | Does introducing or abolishing a policy measure affect the eligible individuals in the same way - just with opposite signs or are the reform effects of moving to a more or less generous policy symmetric? This is an important question that standard program evaluation results cannot answer and policy designers may thus implicitly assume symmetry of the effects. To address this issue, it is necessary to have access to a specific policy shock, which preferably implies both positive and negative news to the target group. In this paper, we try to answer the proposed policy evaluation question with opposite signs by exploring a large-scale quasi-experiment in unemployment insurance with imperfectly informed UI claimers: Job seekers are confronted with either an upgrade or a downgrade of their benefit eligibility within their unemployment spell, without being initially fully informed about the change. They face, however, exactly the same size of treatment: an increase or decrease of the potential benefit duration (PBD) by 200 days. We first compare the treatment effects of these update cases with the reference case, in which individuals are fully informed about their PBD. We identify the treatment effect around the threshold of age 25 where PBD rules change in the Swiss UI system. We find substantial differences in the treatment effects across cases with different expectations on benefit change. This applies to job finding and earnings outcomes. Secondly, the effects are asymmetric both quantitatively and qualitatively. The differences are consistent with patterns of loss aversion or of consumption commitment behavior. We also show that policy uncertainty reinforces the job finding effect of a downgrade shock. |
| JEL: | J68 D83 J64 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145519&r=upt |
| By: | Gökhan Buturaky (Freelance Researcher); Özgür Evren (New Economic School) |
| Abstract: | We propose a model of "choice overload" which refers to a stronger tendency to select the default option in larger choice problems. Our main finding is a behavioral characterization of an asymmetric regret representation that depicts a decision maker who does not consider the possibility of experiencing regret for choosing the default option. By contrast, the value of ordinary alternatives is subject to regret. The calculus of regret for ordinary alternatives is identical to that in Sarver's (2008) anticipated regret model, despite the fact that the primitives of the two theories are different. Our model can also be applied to choice problems with the option to defer the decision. |
| Keywords: | Choice overload, anticipated regret, subjective states, choice deferral |
| JEL: | D11 D81 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:cfr:cefirw:w0235&r=upt |
| By: | Giovanni Barone-Adesi (University of Lugano, Ecole Polytechnique Fédérale de Lausanne, and Swiss Finance Institute); Loriano Mancini (Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute); Hersh Shefrin (Santa Clara University) |
| Abstract: | We estimate aggregate preferences, beliefs, and sentiment from option prices and historical returns. Our market-based estimates correlate well with independent survey-based estimates, and yet provide a number of novel insights. Our analysis points out two significant issues related to overconfidence. First, the Baker--Wurgler index strongly reflects excessive optimism but not overconfidence. Second, optimism and overconfidence comove over time and generate a perceived negative risk-return relationship, while objectively the relationship is positive. The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2295896 |
| Keywords: | Sentiment, Pricing Kernel, Optimism, Overconfidence, Option Data |
| JEL: | G02 G12 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1221&r=upt |
| By: | Nina Anchugina; Matthew Ryan; Arkadii Slinko |
| Abstract: | We prove an analogue of Weitzman's (1998) famous result that an exponential discounter who is uncertain of the appropriate exponential discount rate should discount the far-distant future using the lowest (i.e., most patient) of the possible discount rates. Our analogous result applies to a hyperbolic discounter who is uncertain about the appropriate hyperbolic discount rate. In this case, the far-distant future should be discounted using the probability-weighted harmonic mean of the possible hyperbolic discount rates. |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1702.01362&r=upt |
| By: | Segovia, Michelle S.; Palma, Marco A.; Chavez, Daniel E. |
| Keywords: | Choice Experiments, Eye-Tracking, Consistency, Food Consumption/Nutrition/Food Safety, Institutional and Behavioral Economics, C91, C18, |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ags:saea17:252858&r=upt |
| By: | Lamb Wubin; Naixin Ren |
| Abstract: | As we know, there is a controversy about the decision making under risk between economists and psychologists. We discuss to build a unified theory of risky choice, which would explain both of compensatory and non-compensatory theories. Obviously, decision strategy is not stuck in a rut, but based on the things, in the real life, and experiment materials, in the laboratory. We believe that human has a decision structure, which has constant and variable, interval, concepts of probability and value. Namely, according to cognition ability, we argue that people could not build a continuous and accurate subjective probability world, but several intervals of probability perception. More precisely, decision making is an order reduction process, which is simplifying the decision structure. However, we are not really sure which reduction path will occur during decision making process. It is why preference reversal always happens when making decisions. The most efficient way to reduce the order of decision structure is mathematical expectation. We also argue that the deliberation time at least has four parts, which are consist of substitution time,{\tau}''(G) d{\tau} time, {\tau}'(G) d{\tau} time and calculation time. Decision structure can simply explain the phenomenon of paradoxes and anomalies. JEL Codes: C10, D03, D81. |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1701.08567&r=upt |
| By: | Damien Ackerer (Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute); Thibault Vatter (Ecole Polytechnique Fédérale de Lausanne and University of Lausanne) |
| Abstract: | We introduce a class of flexible and tractable static factor models for the joint term structure of default probabilities, the factor copula models. These high dimensional models remain parsimonious with pair copula constructions, and nest numerous standard models as special cases. With finitely supported random losses, the loss distributions of credit portfolios and derivatives can be exactly and efficiently computed. Numerical examples on collateral debt obligation (CDO), CDO squared, and credit index swaption illustrate the versatility of our framework. An empirical exercise shows that a simple model specification can fit credit index tranche prices. |
| Keywords: | credit portfolio, credit derivatives, discrete Fourier transform, factor copula, random loss, survival models |
| JEL: | C10 G12 G13 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1659&r=upt |
| By: | COSAERT Sam |
| Abstract: | Preferences differ in the population, and this heterogeneity may not be adequately described by observed characteristics and additive error terms. As a first contribution, this study shows that preference heterogeneity can be represented graphically by means of violations of the Weak Axiom of Revealed Preference (WARP), and that computing the minimum number of partitions necessary to break all WARP violations in the sample is equivalent to computing the chromatic number of this graph. Second, the study builds the bridge between revealed preference theory and cluster analysis to assign individuals to these partitions (i.e. preference types). The practical methods are applied to Dutch labour supply data, to recover reservation wages of individuals who belong to particular preference types. |
| Keywords: | preference heterogeneity; chromatic number; revealed preference; labour supply; constrained clustering |
| JEL: | C14 C38 C44 D12 D13 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:irs:cepswp:2017-01&r=upt |
| By: | Danzer, Natalia; Danzer, Alexander M.; Fehr, Ernst |
| Abstract: | In modern economics, preferences are the unmoved movers of economic and social behavior. They are taken as given such that all social phenomena need to be explained by changes in beliefs or constraints. The assumption of given preferences constitutes however merely a convenient assumption that is not supported by evidence. Here, we examine the impact of radiation fallout after the nuclear catastrophe on the preferences and beliefs of the Ukrainian population. As the geographical distribution of radiation is essentially randomly determined by local and regional weather conditions, the radiation fallout after the catastrophe in Chernobyl constitutes a natural experiment. We find that people who were subjects to higher radiation after the catastrophe display stronger risk aversion and a higher discounting of future returns. They save less, are much less inclined to support democratic political institutions and market economies, and they engage less in political and civic activities. Because we exclude the people in the vicinity of Chernobyl from our sample, the radiation fallout "consumed" by our sample population is very low – comparable to the exposure of an average individual during one year in a non-contaminated environment. It is therefore highly unlikely that the direct health consequences of radiation fall out affect people's economic and political preferences. It rather seems that the impact is purely psychologically mediated and due to the pervasive uncertainty or fear stemming from the imagined future consequences associated with physically unnoticeable and unseizable radiation fall-out. |
| JEL: | A12 D03 D12 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145944&r=upt |
| By: | BOSMANS, Kristof (Maastricht University); DECANCQ, Koen (University of Antwerp); OOGHE, Erwin (KU Leuven) |
| Abstract: | We provide an axiomatic justification to aggregate money metrics. The key axiom requires the approval of richer-to-poorer transfers that preserve the overall efficiency of the distribution. This transfer principle, together with the basic axioms anonimity, continuity, monotonicity, and a version of welfarism, characterizes a standard social welfare function defined over money metric utilities. |
| Keywords: | Money metric utility, Transfer principle, efficiency |
| JEL: | D61 D63 D71 I31 |
| Date: | 2016–09–18 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2016035&r=upt |
| By: | Robert Hahn; Robert D. Metcalfe; David Novgorodsky; Michael K. Price |
| Abstract: | We explore Tinbergen's fundamental insight that policymakers need at least as many policy instruments as targets. We extend this idea using a large natural field experiment in water resource management. We use social comparisons and loss-framed messages to help achieve two goals of our partner utility: getting consumers to purchase drought-resistant plants and reducing water use. Our results show that seemingly related behavioral instruments can affect different household decisions. By themselves, social comparisons and loss framing have no significant impact on the number of rebate requests; when combined, however, they lead to a 36% increase in requests. Only loss framing leads to a significant increase in the purchase of drought-resistant plants, and only the social comparison reduces water consumption. These results highlight the importance of testing different combinations of instruments, particularly when policymakers have multiple goals and the relationship between instruments and goals is uncertain. |
| Keywords: | technology adoption, loss aversion, social norms, water conservation |
| JEL: | D12 H41 Q25 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:exc:wpaper:2016-05&r=upt |
| By: | Gautam, Tej K.; Paudel, Krishna P.; Guidry, Kurt M. |
| Abstract: | We conducted survey to collect information from Louisiana farmers to understand their concerns related to irrigation water quality and availability of sufficient water for crop irrigation. We used logistic models to estimate the willingness to pay (WTP) for irrigation water during critical crop growing periods. Variables affecting the participation in WTP are income, land holding size, risk aversion, and education. Our estimated results show that farmers with higher education are more likely to pay for irrigation water compared to farmers with high school and college degree. Age of the farmers, farm revenue, size of the rented land have negative effect on willingness to pay for irrigation water. The sizes of the owned land and risk aversion factor have positive effect on willingness to pay. |
| Keywords: | willingness to pay/Willingness to accept, water trading, irrigation technology, logit, soybean, Production Economics, Resource /Energy Economics and Policy, Q12, Q25, |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:ags:saea17:252821&r=upt |
| By: | Armstrong, Mark; Chen, Yongmin |
| Abstract: | We investigate the marketing practice of framing a price as a discount from an earlier price. We discuss two reasons why a discounted price---rather than a merely low price---can make a rational consumer more willing to purchase. First, a high initial price can indicate the seller has chosen to supply a high-quality product. Second, a seller with limited stock runs a clearance sale, later consumers infer that an unsold product may be poor quality, but if the initial price was higher they do not downgrade their evaluation of quality as much. In either case, if able to do so a seller has an incentive to engage in fictitious pricing, where the reported initial price is exaggerated. |
| Keywords: | Reference dependence, sales tactics, false advertising, fictitious pricing, consumer protection |
| JEL: | D42 D83 L15 M31 M37 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:76681&r=upt |