|
on Utility Models and Prospect Theory |
|
Issue of 2017‒02‒19
twenty papers chosen by |
| By: | Ali al-Nowaihi; Sanjit Dhami; Jia Zhu |
| Abstract: | We show that rank dependent expected utility theory can explain the St. Petersburg paradox. This complements recent work by Blavatskyy (2005), Camerer (2005), Rieger and Wang (2006) and Pfiffelmann (2011). |
| Keywords: | St. Petersburg paradox, Rank dependent expected utility theory. |
| JEL: | C60 D81 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:15/22&r=upt |
| By: | Müller, Julia; Li, Zhihua; Wakker, Peter P.; Wang, Tong V. |
| Abstract: | Ellsberg and others suggested that decision under ambiguity is a rich empirical domain with many phenomena to be investigated beyond the Ellsberg urns. We provide a systematic empirical investigation of this richness by varying both the uncertain events, the outcomes, and combinations of these. Although ambiguity aversion is prevailing, we also find systematic ambiguity seeking, confirming insensitivity. We find that ambiguity attitudes depend on the source of uncertainty (the kind of uncertain event) but not on the outcomes. Ambiguity attitudes are closer to rationality (ambiguity neutrality) for natural uncertainties than for the Ellsberg urns, as appearing from the reductions of monotonicity violations and of insensitivity. Our rich domain serves well to test families of weighting functions for fitting ambiguity attitudes. We find that two-parameter families, capturing not only aversion but also insensitivity, are desirable for ambiguity even more than for risk. The Goldstein-Einhorn family performs best for ambiguity. |
| JEL: | D81 C91 D80 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145734&r=upt |
| By: | Leonid Azarnert |
| Abstract: | This paper studies the effect of refugee resettlement on human capital accumulation. The analysis is performed in a growth model with endogenous fertility. I propose a redistribution scheme and show that refugee resettlement from a more advanced and wealthier economy to a less advanced and less wealthy economy combined with income transfers can give rise to conditions in which utility of indigenous populations in both countries increases. I also derive conditions for the proposed resettlement policy to stimulate human capital accumulation and hence economic growth in both economies. |
| Keywords: | Refugee resettlement, fertility, human capital, growth |
| JEL: | D3 F22 J1 O1 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:wsr:wpaper:y:2017:i:175&r=upt |
| By: | Dietzenbacher, Bas (Tilburg University, Center For Economic Research) |
| Abstract: | This paper analyzes bankruptcy games with nontransferable utility as a generalization of bankruptcy games with monetary payoffs. Following the game theoretic approach to NTU-bankruptcy problems, we study some appropriate properties and the core of NTU-bankruptcy games. Generalizing the core cover and the reasonable set to the class of NTU-games, we show that NTU-bankruptcy games are compromise stable and reasonable stable. Moreover, we derive a necessary and sufficient condition for an NTU-bankruptcy rule to be game theoretic. |
| Keywords: | NTU-bankruptcy problem,; NTU-bankruptcy game,; compromise stability,; reasonable stability; game theoretic bankruptcy rule |
| JEL: | C71 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiucen:1cc9f5ff-f889-43ec-93af-c8db469243d4&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: | A mixed manna contains goods (that everyone likes), bads (that everyone dislikes), as well as items that are goods to some agents, but bads or satiated to others. If all items are goods and utility functions are homothetic, concave (and monotone), the Competitive Equilibrium with Equal Incomes maximizes the Nash product of utilities: hence it is welfarist (determined utility-wise by the feasible set of pro les), single-valued and easy to compute. We generalize the Gale-Eisenberg Theorem to a mixed manna. The Competitive division is still welfarist and related to the product of utilities or disutilities. If the zero utility pro le (before any manna) is Pareto dominated, the competitive pro le is unique and still maximizes the product of utilities. If the zero pro le is unfeasible, the competitive pro les are the critical points of the product of disutilities on the eciency frontier, and multiplicity is pervasive. In particular the task of dividing a mixed manna is either good news for everyone, or bad news for everyone. We re ne our results in the practically important case of linear preferences, where the axiomatic comparison between the division of goods and that of bads is especially sharp. When we divide goods and the manna improves, everyone weakly bene ts under the competitive rule; but no reasonable rule to divide bads can be similarly Resource Monotonic. Also, the much larger set of Non Envious and Ecient divisions of bads can be disconnected so that it will admit no continuous selection. |
| Keywords: | fair division, mixed manna, goods, bads, competitive equilibrium with equal incomes, Nash product, envy-freeness, resource monotonicity, independence of lost bids |
| JEL: | D61 D63 D82 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:hig:wpaper:158/ec/2017&r=upt |
| By: | Ricardo J. Caballero; Emmanuel Farhi; Pierre-Olivier Gourinchas |
| Abstract: | The secular decline in safe interest rates since the early 1980s has been the subject of considerable attention. In this short paper, we argue that it is important to consider the evolution of safe real rates in conjunction with three other first-order macroeconomic stylized facts: the relative constancy of the real return to productive capital, the decline in the labor share, and the decline and subsequent stabilization of the earnings yield. Through the lens of a simple accounting framework, these four facts offer suggestive insights into the economic forces that might be at work. |
| JEL: | E01 E22 E25 G1 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23127&r=upt |
| By: | Chew, Soo Hong (National University of Singapore); Yi, Junjian (National University of Singapore); Zhang, Junsen (Chinese University of Hong Kong); Zhong, Songfa (National University of Singapore) |
| Abstract: | We study the role of risk aversion underlying son preference in patriarchal societies, where sons serve as better insurance for old-age support than daughters. The implications of an insurance motive on son preference are two-fold. First, prior to the birth of their children, more risk-averse parents have a stronger preference for sons than for daughters. Second, after the birth of their children, parents with sons are more risk seeking, compared to parents with daughters. We adopt a within-twin-pair fixed-effects estimator with a weak identification assumption, which enables us to jointly identify these two effects. We further conduct an incentivized choice experiment to assess parental risk attitude in a sample of Chinese twins with children, and follow up with a second twin sample to examine the replicability of the findings. In both samples, we find that parents with greater risk aversion before the birth of their children are more likely to have sons through sex selection than parents with less risk aversion. Additionally, having sons significantly decreases parental risk aversion. These results contribute to the literature on the sources of son preference and help shed light on the nature of gender inequality. |
| Keywords: | risk aversion, son preference, twins, experimental economics |
| JEL: | C93 D01 D80 J13 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp10519&r=upt |
| By: | Maier, Michael; Argaw, Bethlehem A.; Maier, Michael F.; Skriabikova, Olga J. |
| Abstract: | In this paper, we investigate the relationship between individuals' willingness to take risk and job mobility during the early career. Job change is a risky decision since it involves substantial costs without entirely foreseeing the benefits at the time the decision is made. We incorporate risk preferences as an additional parameter influencing the individual job change behaviour in an on-the-job search model accounting for nonwage job characteristics. Empirically, we show that more risk-averse individuals voluntarily change their jobs less often compared to more risk-tolerant individuals. In addition, since risk-averse individuals demand higher compensation for the risk associated with uncertain nonwage job characteristics, we find that their job changes are associated with higher wage gains. However, more risk-averse individuals do not obtain higher overall wage growth as a result of the early career compared to more risk-tolerant individuals. |
| JEL: | D81 J31 J62 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145677&r=upt |
| By: | Damiaan Persyn (European Commission – JRC) |
| Abstract: | There exist marked differences in the educational attainment of immigrants, depending on both the level and distribution of income in the country of origin and destination. This paper estimates an education-specific gravity equation for migration between European countries. Given the lack of data on migration flows by level of education, these are proxied by the difference in resident migrants by nationality and level of education, between the years 2000 and 1990. I find that highly educated individuals are more likely to migrate. They are less sensitive to geographical and cultural distance as barriers to migration, but are not unambiguously more responsive to wage differentials. Controlling for education-specific wage differences between origin and destination removes only part of the observed differences in migration behaviour between education groups. |
| Keywords: | International migration, Random utility model, Education |
| JEL: | F22 J61 O15 C25 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:ipt:iptwpa:jrc104494&r=upt |
| By: | Corneo, Giacomo (Free University of Berlin) |
| Abstract: | This paper revisits the standard model of labor supply under two additional assumptions: consumption requires time and some limited amount of work is enjoyable. Whereas introducing each assumption without the other one does not produce novel insights, combining them together does if the wage rate is sufficiently high. For top earners, work has a positive marginal utility at the optimum and above a critical wage level it converts into a pure consumption good. Their labor-supply curve is first backward bending and then vertical. This can justify an optimal marginal tax rate on top incomes equal to 100 percent. Top earners in the vertical half-line of the labor-supply curve optimally refrain from spending their entire income. At the macroeconomic level, this can generate a lack of effective demand. With some qualifications, these findings carry over to models that include savings and philanthropy. |
| Keywords: | super-rich, labor supply, time allocation, effective demand, optimal taxation of top labor incomes |
| JEL: | J22 H21 H24 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp10508&r=upt |
| By: | Börjesson , Maria (KTH); Eliasson, Jonas (KTH) |
| Abstract: | This paper discusses to what extent the valuations of travel time savings should be differentiated in applied social cost-benefit analysis. We derive a welfare rule which includes a social cost for monetary redistributions, giving a theoretical underpinning of a situation with a welfare-maximizing government that applies equal weights for all income groups. The welfare rule shows that for projects funded by tax payers, values of time should be differentiated with respect to marginal utilities of time, but not with respect to marginal utilities of income. We stress that to determine the relevant valuations of travel time savings, it is crucial who pays for and benefits from a project in the long run. This point has been somewhat ignored in the literature, but speaks in favour of using the travellers’ actual values of time. We present empirical evidence demonstrating that the variation in values of time, in the dimensions relevant for applied appraisal, primarily stems from differences in the marginal utility of time, due to for instance self-selection and comfort differences. |
| Keywords: | Appraisal; Cost benefit analysis; Equity value of time; Behavioural value of time; Value of time |
| JEL: | R41 R48 |
| Date: | 2017–02–07 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:ctswps:2017_004&r=upt |
| By: | Heiland, Inga |
| Abstract: | Firms facing uncertainty about demand at the time of production expose their shareholders to volatile returns. Risk-averse investors trading multiple assets will favor stocks that tend to yield high returns in bad times, that is, when marginal utility of consumption is high. In this paper, I develop a firm-level gravity model of trade with risk-averse investors to show that firms seeking to maximize their present value will take into account that expected profits on a given destination market will be discounted by shareholders depending on the correlation with their expected marginal utility of consumption. The model predicts that, ceteris paribus, firms sell more to markets where profits covary less with the income of their investors. To test this prediction empirically, I use data on stock returns to estimate the correlation between demand growth in destination markets with expected marginal utility growth of investors in the home country. Then, I use bilateral trade data to test whether exports to markets where demand tends to be high at times when investors' expected marginal utility of consumption is high are larger compared to sales on markets where demand tends to be high at times when investors in the home country are well off anyway. |
| JEL: | F12 F36 G15 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145821&r=upt |
| By: | Valentino Dardanoni (Universita' degli Studi di Palermo); Paola Manzini (University of St Andrews and IZA); Marco Mariotti (Queen Mary University of London); Christopher J. Tyson (Queen Mary University of London) |
| Abstract: | We study the problem of recovering the distribution of cognitive characteristics in a popula- tion of boundedly rational agents from the aggregate choices they make from a fixed menu of alternatives. Two models of limited attention are examined from this point of view, and it is shown that both “consideration probability” and “consideration capacity” distributions are substantially identified by aggregate choice shares. These models are applied to data on over-the-counter painkiller sales, yielding concurrent estimates that on average two or three out of the eight available products are considered in this market. |
| Keywords: | attention, bounded rationality, revealed preference, stochastic choice |
| JEL: | D01 D03 D12 |
| Date: | 2017–02–13 |
| URL: | http://d.repec.org/n?u=RePEc:san:wpecon:1701&r=upt |
| By: | Rosas, Francisco; Acerenza, Santiago; Orazem, Peter |
| Abstract: | gent valuation methods are used to identify observed and unobserved preferences of goods and services. We apply these methods to compute willingness to pay (WTP) for a product conditional on having purchased another offered product. We provide a derivation for own-price and compensated cross-price elasticities whose results suggest a pricing strategy considering all offered goods simultaneously. Therefore, we solve the social planner’s problem maximizing a weighted function of producer’s revenues and consumer’s utility for the set of optimal prices. We show an application to collegiate sports, but these methods can be extended in a straightforward fashion to other goods. |
| Date: | 2016–11–30 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genstf:201611300800001008&r=upt |
| By: | Alvarez Iturri, Silvana Valeria |
| Abstract: | This paper aims to analyze whether the quality of an innovative idea can spur the patent's price. From an economic perspective, we address the question of how the quality of an innovative idea increases the patent's price. We examine the problem for the case of a single innovation rather than patent´s families. Therefore, we follow the assumption that innovative ideas have patents. Nevertheless, the analysis is divided into two stages; first we estimated the quality of the innovation by quantifying information of the patent documents from the patent portfolios of firms of the ICT sector over the period 1996 to 2015. By providing new empirical evidence, we showed that the patent´s quality can be estimate with multiple observed patents' characteristics which are significant related to the utility of the patent in the market and its impact on the follow-on innovation. The analyses also estimate the patent's price in the market for technologies based on the quality index. In the same way, we used information of the patent´s transaction in the ICT sector over the period of 2012- 2015 and review the main costs of the American, European and the international patent system. Our finale results indicate the possibility to reduce the asymmetric information of the quality in the patent´s transactions by using public information. |
| Keywords: | SEM; quality; price; patent; cross section |
| JEL: | O34 O32 C55 C31 |
| Date: | 2017–02–09 |
| URL: | http://d.repec.org/n?u=RePEc:cte:idrepe:24183&r=upt |
| By: | Wei Ma |
| Abstract: | We study general equilibrium theory of complete markets in an otherwise standard economy with each household having an additive perturbed utility function. Since this function represents a type of stochastic choice theory, the equilibrium of the corresponding economy is defined to be a price vector that makes its mean expected demand equal its mean endowment. We begin with a study of the economic meaning of this notion, by showing that at any given price vector, there always exists an economy with deterministic utilities whose mean demand is just the mean expected demand of our economy with additive perturbed utilities. We then show the existence of equilibrium, its Pareto inefficiency, and the upper hemi-continuity of the equilibrium set correspondence. Specializing to the case of regular economies, we finally demonstrate that almost every economy is regular and the equilibrium set correspondence in this regular case is continuous and locally constant. |
| Keywords: | general equilibrium, Stochastic choice, Regular economy |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:654&r=upt |
| By: | Kyle Herkenhoff (University of Minnesota); Gordon Phillips (Dartmouth College Tuck School of Business); Ethan Cohen-Cole (Econ One Research) |
| Abstract: | How does access to consumer credit affect the allocation of workers to firms, and what happens to sorting and the subsequent recovery if credit tightens during a recession? To answer this question, we develop a labor sorting model with saving and borrowing. We show that even with two-sided heterogeneity and risk aversion, the model remains tractable because it admits a unique block recursive solution. We find that if credit limits tighten during a downturn, employment recovers quicker, but output and productivity remain depressed. This is because when limits tighten, low-asset, low-productivity job losers cannot self-insure. Therefore, they search less thoroughly and take more accessible jobs at less productive firms. We then build a new administrative dataset that merges credit reports with employment histories, and we test the model's mechanisms. |
| Keywords: | sorting model, credit constraints, block recursive, self-insurance |
| JEL: | E13 E20 E24 E32 J21 J24 J31 J60 J63 J64 J65 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:hka:wpaper:2017-012&r=upt |
| By: | D’Ambrosio, Anna (University of Turin); Leombruni, Roberto (University of Turin); Razzolini, Tiziano (University of Siena) |
| Abstract: | Applying propensity score reweighting to Italian administrative data covering the period 1994-2012, we study the conditional distributions of injuries by wage of native and foreign workers and distinguish between the component that is explained by observable characteristics and the component that is instead attributable to the immigrant status. Our analyses highlight some stylized facts. Besides a substantial gap in wage and injury risk that cannot be attributed to differences in the characteristics, foreign workers face higher levels of risk by the same level of wages. The gap is significantly above the level predicted by their observable characteristics by remunerations that are close to the minimum wage level set by collective bargaining. After this threshold, injury rates decline, but less steeply for foreign workers than their observable characteristics would predict. We show that the hedonic wage model could explain the first result as a corner solution whereby workers with low wage potential are forced to accept higher levels of risk due to the lower bounds on minimum wage. The second results could simply be explained by assuming different utility functions for natives and foreigners. We also show that the hedonic wage model is compatible with the marked reduction in injury rates and in the gap that we observe in the recession years. |
| Keywords: | occupational injuries, propensity score reweighting, wage gap, foreign workers, Di Nardo-Fortin-Lemieux decomposition |
| JEL: | J28 J70 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp10523&r=upt |
| By: | Dimitrios Varvarigos; Nikolaos Kontogiannis |
| Abstract: | We offer a behavioural approach on the relation between growth and volatility, based on a monetary growth model where entrepreneurs borrow funds to invest in projects that produce capital goods. In addition to their varying pecuniary returns, different projects also vary with respect to the status they confer to the entrepreneurs who operate them. We show that social status promotes capital accumulation. We also show that, even when the status-induced increase of marginal utility is constant over time, the interaction between status and inflation is an additional source of transitional dynamics. When a social norm links this increase of marginal utility to past outcomes, however, the dynamics can generate endogenous cycles in the transition to the balanced growth path. |
| Keywords: | Social status, Norms, Economic growth, Cycles |
| JEL: | E32 O42 Z10 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:17/05&r=upt |
| By: | Leonard C. MacLean; Yonggan Zhao; William T. Ziemba |
| Abstract: | The optimal capital growth strategy or Kelly strategy, has many desirable properties such as maximizing the asympotic long run growth of capital. However, it has considerable short run risk since the utility is logarithmic, with essentially zero Arrow-Pratt risk aversion. It is common to control risk with a Value-at-Risk constraint defined on the end of horizon wealth. A more effective approach is to impose a VaR constraint at each time on the wealth path. In this paper we provide a method to obtain the maximum growth while staying above an ex-ante discrete time wealth path with high probability, where shortfalls below the path are penalized with a convex function of the shortfall. The effect of the path VaR condition and shortfall penalties is less growth than the Kelly strategy, but the downside risk is under control. The asset price dynamics are defined by a model with Markov transitions between several market regimes and geometric Brownian motion for prices within regime. The stochastic investment model is reformulated as a deterministic program which allows the calculation of the optimal constrained growth wagers at discrete points in time. |
| Keywords: | portfolio selection; capital growth; regime switching; convex penalty; value at risk |
| JEL: | J1 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:65486&r=upt |