
on Utility Models and Prospect Theory 
By:  Oleksii Mostovyi; Mihai S\^irbu 
Abstract:  We study the sensitivity of the expected utility maximization problem in a continuous semimartingale market with respect to small changes in the market price of risk. Assuming that the preferences of a rational economic agent are modeled with a general utility function, we obtain a secondorder expansion of the value function, a firstorder approximation of the terminal wealth, and construct trading strategies that match the indirect utility function up to the second order. If a risktolerance wealth process exists, using it as a num\'eraire and under an appropriate change of measure, we reduce the approximation problem to a KunitaWatanabe decomposition. 
Date:  2017–05 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1705.08291&r=upt 
By:  Mogens Fosgerau (DTU  Technical University of Denmark [Lyngby]); Emerson Melo (Indiana University [Bloomington]); André De Palma (ENS Cachan  Ecole Normale Supérieure de Cachan); Matthew Shum (CALTECH  California Institute of Technology) 
Abstract:  This paper establishes a general equivalence between discrete choice and rational inattention models. Matejka and McKay (2015, AER) showed that when information costs are modelled using the Shannon entropy function, the resulting choice probabilities in the rational inattention model take the multinomial logit form. By exploiting convexanalytic properties of the discrete choice model, we show that when information costs are modelled using a class of generalized entropy functions, the choice probabilities in any rational inattention model are observationally equivalent to some additive random utility discrete choice model and vice versa. Thus any additive random utility model can be given an interpretation in terms of boundedly rational behavior. This includes empirically relevant specifications such as the probit and nested logit models. 
Keywords:  convex analysis,generalized entropy,rational inattention,discrete choice,random utility 
Date:  2017–04–07 
URL:  http://d.repec.org/n?u=RePEc:hal:wpaper:hal01501313&r=upt 
By:  Barro, Robert J.; FernándezVillaverde, Jesús; Levintal, Oren; Mollerus, Andrew 
Abstract:  A safe asset's real value is insulated from shocks, including declines in GDP from rare macroeconomic disasters. However, in a Lucastree world, the aggregate risk is given by the process for GDP and cannot be altered by the creation of safe assets. Therefore, in the equilibrium of a representativeagent version of this economy, the quantity of safe assets will be nil. With heterogeneity in coefficients of relative risk aversion, safe assets can take the form of private bond issues from lowriskaversion to highriskaversion agents. The model assumes EpsteinZin/Weil preferences with common values of the intertemporal elasticity of substitution and the rate of time preference. The model achieves stationarity by allowing for random shifts in coefficients of relative risk aversion. We derive the equilibrium values of the ratio of safe to total assets, the shares of each agent in equity ownership and wealth, and the rates of return on safe and risky assets. In a baseline case, the steadystate riskfree rate is 1.0% per year, the unlevered equity premium is 4.2%, and the quantity of safe assets ranges up to 15% of economywide assets (comprising the capitalized value of GDP). A disaster shock leads to an extended period in which the share of wealth held by the lowriskaverse agent and the riskfree rate are low but rising, and the ratio of safe to total assets is high but falling. In the baseline model, Ricardian Equivalence holds in that added government bonds have no effect on rates of return and the net quantity of safe assets. Surprisingly, the crowdingout coefficient for private bonds with respect to public bonds is not 0 or 1 but around 0.5, a value found in some existing empirical studies. 
Date:  2017–05 
URL:  http://d.repec.org/n?u=RePEc:cpr:ceprdp:12043&r=upt 
By:  Rahul Deb (University of Toronto); Yuichi Kitamura (Cowles Foundation, Yale University); John K.H. Quah (Johns Hopkins University); Jorg Stoye (Bonn University) 
Abstract:  We develop a model of demand where consumers tradeoff the utility of consumption against the disutility of expenditure. This model is appropriate whenever a consumer’s demand over a strict subset of all available goods is being analyzed. Data sets consistent with this model are characterized by the absence of revealed preference cycles over prices. The model is readily generalized to the random utility setting, for which we develop nonparametric statistical tests. Our application on national household consumption data provides support for the model. 
Date:  2017–05 
URL:  http://d.repec.org/n?u=RePEc:cwl:cwldpp:2087&r=upt 
By:  Sigrid K\"allblad; Thaleia Zariphopoulou 
Abstract:  We analyze a nonlinear equation proposed by F. Black (1968) for the optimal portfolio function in a lognormal model. We cast it in terms of the risk tolerance function and provide, for general utility functions, existence, uniqueness and regularity results, and we also examine various monotonicity, concavity/convexity and Sshape properties. Stronger results are derived for utilities whose inverse marginal belongs to a class of completely monotonic functions. 
Date:  2017–05 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1705.07472&r=upt 
By:  Emmanuelle AugeraudVéron (MIA  Mathématiques, Image et Applications  ULR  Université de La Rochelle); Giorgio Fabbri (GREQAM  Groupement de Recherche en Économie Quantitative d'AixMarseille  Université de la Méditerranée  AixMarseille 2  Université Paul Cézanne  AixMarseille 3  EHESS  École des hautes études en sciences sociales  AMU  Aix Marseille Université  ECM  Ecole Centrale de Marseille  CNRS  Centre National de la Recherche Scientifique); Katheline Schubert (PSE  Paris School of Economics) 
Abstract:  This paper presents a benchmark endogenous growth model including biodiversity preservation dynamics. Producing food requires land, and increasing the share of total land devoted to farming mechanically reduces the share of land devoted to biodiversity conservation. However, the safeguarding of a greater number of species is associated to better ecosystem services – pollination, flood control, pest control, etc., which in turn ensure a lower volatility of agricultural productivity. The optimal conversion/preservation rule is explicitly characterized, as well as the value of biological diversity, in terms of the welfare gain of biodiversity conservation. The EpsteinZinWeil specification of the utility function allows us to disentangle the effects of risk aversion and aversion to fluctuations. A twoplayer game extension of the model highlights the effect of volatility externalities and the Paretian suboptimality of the decentralized choice. 
Keywords:  biodiversity,stochastic endogenous growth,insurance value,recursive preferences 
Date:  2017–03 
URL:  http://d.repec.org/n?u=RePEc:hal:wpaper:halshs01493965&r=upt 
By:  Eric Bahel; Yves Sprumont 
Abstract:  We model social choices as acts mapping states of nature to (public) out comes. A social choice function (or SCF) assigns an act to every profile of subjective expected utility preferences over acts. A SCF is strategyproof if no agent ever has an incentive to misrepresent her beliefs about the states of na ture or her valuation of the outcomes; it is expost efficient if the act selected at any given preference profile picks a Paretoefficient outcome in every state of nature. We offer a complete characterization of all strategyproof and expost efficient SCFs. The chosen act must pick the most preferred outcome of some (possibly different) agent in every state of nature. The set of states in which an agentâ€™s top outcome is selected may vary with the reported belief profile; it is the union of all the states assigned to her by a collection of bilaterally dictatorial and bilaterally consensual assignment rules. 
Keywords:  Social choice under uncertainty, strategyproofness, subjective expected utility, dictatorship, consensuality, bilaterality 
Date:  2017 
URL:  http://d.repec.org/n?u=RePEc:vpi:wpaper:e0753&r=upt 
By:  Morone, Andrea; Nuzzo, Simone; Temerario, Tiziana 
Abstract:  The recent literature on individual vs. group decisions over risk has brought about divergent results, mainly depending on the institutional rules through which groups take decisions. While some studies where group decisions relied on the majority rule showed no appreciable difference between individuals and groups’ preferences, others where unanimity among group members was required found collective decisions to be less risk averse than individual ones. Of course, these studies share the imposition of a choice rule to determine the groups’ outcome. Alternatively, in the study at hand, we elicited groups’ preferences over risk using a consensus rule, i.e. leaving groups free to endogenously solve the potential disagreement among their members, just as in many real life instances. Our results from a logit regression unambiguously show that individuals’ preferences are systematically further from the risk neutrality than those of groups. In particular, individuals are more risk seeker than groups when facing gambles with positive expected payoff difference and more risk averse in the opposite case. 
Keywords:  Risk attitudes, group’s behaviour 
JEL:  C91 C92 D01 
Date:  2017–05–23 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:79332&r=upt 
By:  Andrés Salamanca (TSE  Toulouse School of Economics  Toulouse School of Economics) 
Abstract:  Several valuelike solutions concepts are computed and compared in a cooperative game with incomplete information and nontransferable utility. 
Keywords:  incomplete information, nontransferable utility,Cooperative games 
Date:  2017–02–15 
URL:  http://d.repec.org/n?u=RePEc:hal:wpaper:hal01500966&r=upt 
By:  Kannai, Yakar (Center for Mathematical Economics, Bielefeld University) 
Date:  2017–05–15 
URL:  http://d.repec.org/n?u=RePEc:bie:wpaper:227&r=upt 
By:  Lindbeck, Assar (Research Institute of Industrial Economics (IFN)); Weibull, Jörgen (Department of Economics) 
Abstract:  We analyze investment decisions when information is costly, with and without delegation to an agent. We use a rationalinattention model and compare it with a canonical signalextraction model. We identify three "investment conditions". In "sour" conditions, no information is acquired and no investment made. In "sweet" conditions, investment is made "blindly", i.e. without acquiring costly information. In intermediate, "normal" conditions, the decisionmaker acquires information and conditions the investment decision upon the information obtained. We investigate if the investor can benefit from employing an agent when the agent's effort and information is private. Not even in the case of a risk neutral agent will the principal perfectly align the agent's incentives with her own at the moment of investment (had the principal known the agent's private information). Optimal contracts for risk neutral agents not only reward good investments but also punishes bad investments. Such contracts include three components: a fixed salary, stocks and options. 
Keywords:  Investment; Rational inattention; Signal Extraction; Principalagent; Information aquisition; Contract; Bonus; Penalty 
JEL:  D01 D82 D86 G11 G23 G30 
Date:  2017–05–22 
URL:  http://d.repec.org/n?u=RePEc:hhs:iuiwop:1171&r=upt 
By:  Gächter, Simon (University of Nottingham); Huang, Lingbo (University of Nottingham); Sefton, Martin (University of Nottingham) 
Abstract:  We present an experiment to investigate the source of disappointment aversion in a sequential realeffort competition. Specifically, we study the contribution of social comparison effects to the disappointment aversion previously identified in a twoperson realeffort competition (Gill and Prowse, 2012). To do this we compare "social" and "asocial" versions of the Gill and Prowse experiment, where the latter treatment removes the scope for social comparisons. If disappointment aversion simply reflects an asymmetric evaluation of losses and gains we would expect it to survive in our asocial treatment, while if losing to or winning against another person affects the evaluation of losses/gains we would expect treatment differences. We find behavior in social and asocial treatments to be similar, suggesting that social comparisons have little impact in this setting. Unlike in Gill and Prowse we do not find evidence of disappointment aversion. 
Keywords:  real effort competition, social comparison effects, disappointment aversion, referencedependent preferences 
JEL:  C91 D12 D81 D84 
Date:  2017–05 
URL:  http://d.repec.org/n?u=RePEc:iza:izadps:dp10754&r=upt 
By:  Keiichi Morimoto (Meisei University) 
Abstract:  This study reexamines the optimal delegation problem of monetary policy under preference uncertainty of the central banker. Liberal central bankers are desirable when uncertainty is strong, which is emphasized when the slope of the Phillips curve is flatter, as some empirical works report. However, appointing conservative central bankers is optimal with standard parameter values when monetary policies are conducted by committees, as in most actual economies. 
Keywords:  monetary policy, delegation, uncertain preferences, committee 
JEL:  E58 
Date:  2017–01 
URL:  http://d.repec.org/n?u=RePEc:mei:wpaper:35&r=upt 
By:  David Lander (Pennsylvania State University); David Gunawan (University of New South Wales); William Griffiths (Department of Economics, University of Melbourne); Duangkamon Chotikapanich (Monash University) 
Abstract:  Because of their applicability for ordering distributions within general classes of utility and social welfare functions, sampling theory tests for stochastic and Lorenz dominance have attracted considerable attention in the literature. We contribute to this literature by proposing a Bayesian approach for assessing Lorenz and stochastic dominance. For two income distributions, say X and Y, estimated via Markov chain Monte Carlo (MCMC), we compute posterior probabilities for (i) X dominates Y, (ii) Y dominates X, and (iii) neither Y nor X is dominant by counting the proportions of MCMC draws that satisfy the constraints implied by each of the alternatives. We apply the proposed approach to samples of Indonesian income distributions for 1999, 2002, 2005 and 2008. To ensure flexible modelling of the distributions, mixtures of gamma densities are fitted for each of the years. We introduce probability curves that depict the probability of dominance at each population proportion and which convey valuable information about dominance probabilities for restricted population proportions relevant when studying poverty orderings. The dominance probabilities are compared with pvalues from some sampling theory tests; the probability curves are used to gain insights into seemingly contradictory outcomes 
Keywords:  Dominance probabilities, poverty comparisons, MCMC, gamma mixture. 
JEL:  C11 C12 D31 I32 
Date:  2017–03 
URL:  http://d.repec.org/n?u=RePEc:mlb:wpaper:2029&r=upt 
By:  Samuel N. Cohen 
Abstract:  Estimation of tail quantities, such as expected shortfall or Value at Risk, is a difficult problem. We show how the theory of nonlinear expectations, in particular the Datarobust expectation introduced in [4], can assist in the quantification of statistical uncertainty for these problems. However, when we are in a heavytailed context (in particular when our data are described by a Pareto distribution, as is common in much of extreme value theory), the theory of [4] is insufficient, and requires an additional regularization step which we introduce. By asking whether this regularization is possible, we obtain a qualitative requirement for reliable estimation of tail quantities and risk measures, in a Pareto setting. 
Date:  2017–05 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1705.08301&r=upt 
By:  Schwirplies, Claudia; Dütschke, Elisabeth; Schleich, Joachim; Ziegler, Andreas 
Abstract:  This paper identifies potential drivers and individuals' willingness to pay (WTP) for offsetting their emissions from traveling. We focus on the effects of framing the polluting activity with different modes of transportation (i.e. bus and plane) and travel occasions (i.e. holiday and professional training) as well as the effects of contributions from the travel provider. The analyses are based on discrete choice experiments with a representative sample of about 1000 consumers from Germany. Applying mixed logit and latent class logit models, the findings suggest substantial framing effects resulting from the variation in the mode of transportation as well as a significantly higher WTP when offsets are matched by the travel provider 1:1. The findings further indicate that re/afforestation projects in the participants' region are the preferred mode for compensation. Respondents who are more willing to offset emissions from traveling seem to be younger and female, have a higher income, exhibit stronger environmental and social preferences, and believe that offsetting is effective in protecting the climate. 
Keywords:  climate change,carbon offsetting,framing effects,provider contribution,willingness to pay,discrete choice experiments 
JEL:  H41 Q54 Q58 
Date:  2017 
URL:  http://d.repec.org/n?u=RePEc:zbw:fisisi:s052017&r=upt 
By:  Véronique MaumeDeschamps (ICJ  Institut Camille Jordan [Villeurbanne]  ECL  École Centrale de Lyon  UCBL  Université Claude Bernard Lyon 1  UJM  Université Jean Monnet [SaintEtienne]  INSA  Institut National des Sciences Appliquées  CNRS  Centre National de la Recherche Scientifique); Didier Rullière (SAF  Laboratoire de Sciences Actuarielle et Financière  UCBL  Université Claude Bernard Lyon 1); Khalil Said (Ecole d'Actuariat  Université Laval) 
Abstract:  In [16], a new family of vectorvalued risk measures called multivariate expectiles is introduced. In this paper, we focus on the asymptotic behavior of these measures in a multivariate regular variations context. For models with equivalent tails, we propose an estimator of these multivariate asymptotic expectiles, in the Fréchet attraction domain case, with asymptotic independence, or in the comonotonic case. 
Keywords:  Risk measures, multivariate expectiles, regular variations, extreme values, tail dependence functions 
Date:  2017–04–18 
URL:  http://d.repec.org/n?u=RePEc:hal:wpaper:hal01509963&r=upt 
By:  McCarthy, David; Mikkola, Kalle; Thomas, Teruji 
Abstract:  We provide conditions under which an incomplete strongly independent preorder on a convex set X can be represented by a set of mixture preserving realvalued functions. We allow X to be infinite dimensional. The main continuity condition we focus on is mixture continuity. This is sufficient for such a representation provided X has countable dimension or satisfies a condition that we call Polarization. 
Keywords:  Expected utility Multirepresentation Incompleteness Mixture continuity 
JEL:  D11 D81 
Date:  2017–05–22 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:79284&r=upt 