nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2017‒11‒12
eleven papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Field experiments on the development of time preferences By James Andreoni; Michael Kuhn; John List; Anya Samek; Charles Sprenger
  2. Willingness-To-Pay and Willingness-To-Accept are Probably Less Correlated than You Think By Jonathan Chapman; Pietro Ortoleva; Erik Snowberg; Colin Camerer; Mark Dean
  3. Testing consumer theory: Evidence from a natural field experiment By Adena, Maja; Huck, Steffen; Rasul, Imran
  4. Qualitative analysis of common belief of rationality in strategic-form games By Giacomo Bonanno; Elias Tsakas
  5. Sustainability with endogenous discounting By John M. Hartwick; Ngo Van Long
  6. Bounding Counterfactual Demand with Unobserved Heterogeneity and Endogenous Expenditures By Laurens Cherchye; Bram De Rock; Thomas Demuynck
  7. How Multi-Destination Firms Shape the Effect of Exchange Rate Volatility on Trade: Micro Evidence and Aggregate Implications By Jérôme Héricourt; Clément Nedoncelle
  8. Constrained vs Unconstrained Labor Supply: The Economics of Dual Job Holding By Choe, Chung; Oaxaca, Ronald L.; Renna, Francesco
  9. Constrained portfolio-consumption strategies with uncertain parameters and borrowing costs By Zhou Yang; Gechun Liang; Chao Zhou
  10. Kuhn's Theorem for Extensive Games with Unawareness By Burkhard Schipper
  11. Does Exposure to Unawareness Affect Risk Preferences? A Preliminary Result By Wenjun Ma; Burkhard Schipper

  1. By: James Andreoni; Michael Kuhn; John List; Anya Samek; Charles Sprenger
    Abstract: Time preferences have been correlated with a range of life outcomes, yet little is known about their early development. We conduct a field experiment to elicit time preferences of nearly 1,000 children ages 3-12, who make several inter temporal decisions. To shed light on how such primitives form, we explore various channels that might affect time preferences, from background characteristics to the causal impact of an early schooling program that we developed and operated. Our results suggest that time preferences evolve substantially during this period with younger children displaying more impatience than older children. We also find a strong association with race: black children, relative to white or Hispanic children, are more impatient. Interestingly, parents of black children are also much more impatient than parents of white and Hispanic children. Finally, assignment to different schooling opportunities is not significantly associated with child time preferences.
    Date: 2017
  2. By: Jonathan Chapman; Pietro Ortoleva; Erik Snowberg; Colin Camerer; Mark Dean
    Abstract: Willingness to pay (WTP) and willingness to accept (WTA) a monetary amount for a lottery should be closely related. In data from an incentivized survey of a representative sample of 3,000 U.S. adults, we find that WTA and WTP for a lottery are, at best, weakly correlated. Across all respondents, the correlation is slightly negative. For the subgroups that we examine, the correlation is almost always small, typically statistically insignificant, and often negative. The exception is respondents who score highly on a within-study IQ test, where the correlation is around 0.2. A meta-study of similar lab experiments with university students also shows a correlation of around 0.15-0.2. While poorly related to each other, our measures of WTA and WTP are strongly related to different measures of risk aversion, and relatively stable across time. These various patterns allow us to show that this lack of relationship between WTA and WTP is compatible with existing theories, such as Prospect Theory and Stochastic Reference Dependence, only under very specific, and unlikely, correlational structures between parameters. We suggest a simpler formalization.
    Keywords: willingness to pay, willingness to accept, endowment effect, loss aversion, risk aversion
    Date: 2017
  3. By: Adena, Maja; Huck, Steffen; Rasul, Imran
    Abstract: We present evidence from a natural field experiment designed to shed light on whether individual behavior is consistent with a neoclassical model of utility maximization subject to budget constraints. We do this through the lens of a field experiment on charitable giving. We find that the behavior of at least 80% of individuals, on both the extensive and intensive margins, can be rationalized within a standard neoclassical choice model in which individuals have preferences, defined over own consumption and their contribution towards the charitable good, satisfying the axioms of revealed preference.
    Keywords: natural field experiment,revealed preference
    JEL: C93 D01 D12 D64
    Date: 2017
  4. By: Giacomo Bonanno; Elias Tsakas (Department of Economics, University of California Davis)
    Abstract: We study common belief of rationality in strategic-form games with ordinal utilities, employing a model of qualitative beliefs. We characterize the three main solution concepts for such games, viz., Iterated Deletion of Strictly Dominated Strategies (IDSDS), Iterated Deletion of Boergers-dominated Strategies (IDBS) and Iterated Deletion of Inferior Strategy Profiles (IDIP), by means of gradually restrictive properties imposed on the models of qualitative beliefs. As a corollary, we prove that IDIP refines IDBS, which refines IDSDS.
    Keywords: Qualitative likelihood relation, ordinal payoffs, common belief of rationality, iterative deletion procedures
    JEL: C7
    Date: 2017–05–12
  5. By: John M. Hartwick; Ngo Van Long
    Abstract: We construct a dynamic competitive model with a stock of man-made capital and several stocks of natural resources and ask under what conditions consumption will be constant if in nitesimal households with heterogeneous preferences and endowments discount their utility ows at an endogenous rate that depends some macroeconomic variables. We show that for consumption to be constant, this function must be the marginal product ofcapital function. We demonstrate that Hartwicks Rule (that along the constant consumption path, resource rents must be invested in man-made capital) holds in a modi ed form that takes account of natural growth of resource stocks.
    JEL: Q01 Q32
    Date: 2017–10–30
  6. By: Laurens Cherchye; Bram De Rock; Thomas Demuynck
    Abstract: We propose a novel method to predict rational counterfactual demand responses from an observed set of repeated cross-sections. Our method derives bounds on the distribution of counterfactual demands that are consistent with the Weak Axiom of Revealed Preferences without putting any restriction on the preference heterogeneity across consumers. In contrast to existing methods, our method also allows for endogeneity of total expenditures. In addition, the method can readily incorporate restrictions on the income elasticities of the consumption goods, which further enhances its identifying power (i.e. tighter bounds). The method is easy to implement and yields informative bounds on demand, which we illustrate through an application to data drawn from the U.S. Consumer Expenditure Survey (CEX).
    Keywords: unobserved heterogeneity; endogenous expenditures; WARP; counterfactual demand
    JEL: C14 D12
    Date: 2017–11
  7. By: Jérôme Héricourt; Clément Nedoncelle
    Abstract: Based on a large French firm-level database that combines information on balance-sheet and destination-specific export values and volumes over the period 1995-2009, this article investigates how heterogeneous exporters react to real exchange-rate volatility. We find that strongly multi-destination firms tend to reduce both their export values and volumes to a destination that face higher exchange-rate volatility, while firms serving only a few destinations increase their market share. This result is robust to various specifications, samples, potential omitted variables, as well as hedging strategies, and is not specific to multinational firms. We also show that, following an exchange-rate volatility shock in a given country, export values and volumes to all other destinations served increase with the number of destinations served by the firm. These results are consistent with models under uncertainty, where the risk increases with firm size, and risk-averse behavior is equivalent to a preference for diversification. Therefore, this paper proposes an additional potential explanation for the macro puzzle of the muted reaction of aggregate exports to exchange-rate volatility. Since big multi-destination firms, which account for the bulk of aggregate exports, minimize their overall risk exposure by diverting their exports from high- to low-volatility markets, this contributes to exports at the macro level remaining unchanged in the main.
    Keywords: Real Exchange Rate Volatility, Multi-destination Exporters, Diversification, Aggregation
    Date: 2017–05
  8. By: Choe, Chung; Oaxaca, Ronald L.; Renna, Francesco
    Abstract: This paper develops a unified model of dual and unitary job holding based on a Stone-Geary utility function. The model incorporates both constrained and unconstrained labor supply. Panel data methods are adapted to accommodate unobserved heterogeneity and multinomial selection into 6 mutually exclusive labor supply regimes. We estimate the wage and income elasticities arising from selection and unobserved heterogeneity as well as from the Stone-Geary Slutsky equations. The labor supply model is estimated with data from the British Household Panel Survey 1991- 2008. Among dual job holders, our study finds that the Stone-Geary income and wage elasticities are much larger for labor supply to the second job compared with the main job. When the effects of selection and unobserved heterogeneity are taken account of, the magnitudes of these elasticities on the second job tend to be significantly reduced.
    Keywords: dual job,labor supply,Stone-Geary,hours constraint
    JEL: J01 J22 J49
    Date: 2017
  9. By: Zhou Yang; Gechun Liang; Chao Zhou
    Abstract: This paper studies the properties of the optimal portfolio-consumption strategies in a {finite horizon} robust utility maximization framework with different borrowing and lending rates. In particular, we allow for constraints on both investment and consumption strategies, and model uncertainty on both drift and volatility. With the help of the explicit solution, we quantify the impacts of uncertain market parameters, portfolio-consumption constraints and borrowing costs on the optimal strategies and their time monotone properties.
    Date: 2017–11
  10. By: Burkhard Schipper (Department of Economics, University of California Davis)
    Abstract: We extend Kuhn's Theorem to extensive games with unawareness. This extension is not entirely obvious: First, extensive games with non-trivial unawareness involve a forest of partially ordered game trees rather than just one game tree. An information set at a history in one tree may consist of histories in a less expressive tree. Consequently, perfect recall takes a more complicated form as players may also become aware of new actions during the play. Second, strategies can only be partially an object of ex-ante choice in games with unawareness. Finally, histories that a player may expect to reach with a strategy profile may not be the histories that actually occur with this strategy profile, requiring us to define appropriate notions of equivalence of strategies.
    Keywords: perfect recall, mixed strategy, behavior strategy, unawareness.
    JEL: C72 D83
    Date: 2017–11–02
  11. By: Wenjun Ma; Burkhard Schipper (Department of Economics, University of California Davis)
    Abstract: One fundamental assumption often made in the literature on unawareness is that risk preferences are invariant to changes of awareness. We study how exposure to unawareness affects choices under risk. Participants in our experiment choose repeatedly between varying sure outcomes and a lottery in 3 phases. All treatments are exactly identical in phase 1 and phase 3, but differ in phase 2. There are five different treatments pertaining to the lottery faced in phase 2: The control treatment (i.e., a standard lottery), the treatment with awareness of unawareness of lottery outcomes but known number of outcomes, the treatment with awareness of unawareness of outcomes but with unknown number of outcomes, the treatment with unawareness of unawareness of some outcomes, and the treatment with an ambiguous lottery. We study both whether behavior differs in phase 3 across treatments (between subjects effect) and whether differences of subjects' behavior between phases 1 and phase 3 differs across treatments (within subject effects). We observe no significant treatment effects.
    Keywords: Unawareness, Awareness of unawareness, Risk aversion, Experiments
    JEL: C91 C92 D81 D87
    Date: 2017–05–02

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