nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2018‒02‒05
nine papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Strategic Decentralization and the Provision of Global Public Goods By Foucart, Renaud; Wan, Cheng
  2. How Bargaining in Marriage Drives Marriage Market Equilibrium By Robert A. Pollak
  3. The time interpretation of expected utility theory By Ole Peters; Alexander Adamou
  4. Pairwise stable matching in large economies By Michael Greinecker; Christopher Kah
  5. Positional Goods and Social Welfare:A Note on George Pendleton Watkins’ Neglected Contribution By Luca Fiorito; Massimiliano Vatiero
  6. On the Observational Implications of Knightian Uncertainty By Hassett, Kevin; Zhong, Weifeng
  7. Viable Insider Markets By Olfa Draouil; Bernt {\O}ksendal
  8. News, Noise and Oil Price Swings By Gambetti, Luca; Moretti, Laura
  9. On strategy-proofness and single-peakedness: median-voting over intervals By Protopapas, Panos

  1. By: Foucart, Renaud (Humboldt University Berlin); Wan, Cheng (Shanghai University of Finance and Economics)
    Abstract: We study strategic decentralization in the provision of a global public good. A federation, with the aim of maximizing the aggregate utility of its members, may find it advantageous to decentralize the decision-making, so that its members act autonomously to maximize their own utility. If utility is fully transferable within a federation, the larger a federation is or the more sensitive it is to the public good, the more it has incentives to remain centralized. If an overall increase in the sensitivity to the public good induces some federation(s) to decentralize, it may lead to a decrease in the aggregate provision. With non-transferable utility within a federation, those members that are smaller or less sensitive to the public good are more likely to prefer decentralization. Some members within a federation becoming more sensitive to the public good may thus lead to a lower aggregate provision, because the increased heterogeneity of the federation makes it more inclined to decentralize.
    Keywords: ;
    Date: 2018–01–18
  2. By: Robert A. Pollak (Washington University in St. Louis)
    Abstract: This paper investigates marriage market equilibrium under the assumption that Bargaining In Marriage (BIM) determines allocation within marriage. Prospective spouses, when they meet in the marriage market, are assumed to foresee the outcome of BIM and rank prospective spouses on the basis of the utilities they foresee emerging from BIM. Under these assumptions, the marriage market is the first stage of a multi-stage game -- in the simplest case, a two-stage game -- that must be solved by backwards induction. The marriage market determines both who marries and, among those who marry, who marries whom. Bargaining in the second and any subsequent stages determines allocation within each marriage. When BIM determines allocation within marriage, the appropriate framework for analyzing marriage market equilibrium is the Gale-Shapley matching model. In contrast, the standard model of marriage market equilibrium assumes that prospective spouses make Binding Agreements in the Marriage Market (BAMM) that determine allocation within marriage. If we assume BAMM and transferable utility, then the appropriate framework for analyzing marriage market equilibrium is the Koopmans-Beckmann-Shapley-Shubik assignment model. BIM and BAMM have different implications not only for allocation within marriage but also for who marries, who marries whom, the number of marriages, and the Pareto efficiency of marriage market equilibrium.
    Keywords: Binding Agreements in the Marriage Market, BAMM, bargaining in marriage, marital bargaining, marriage market
    JEL: D10 J12 K36
    Date: 2018
  3. By: Ole Peters; Alexander Adamou
    Abstract: Decision theory is the model of individual human behavior employed by neoclassical economics. Built on this model of individual behavior are models of aggregate behavior that feed into models of macroeconomics and inform economic policy. Neoclassical economics has been fiercely criticized for failing to make meaningful predictions of individual and aggregate behavior, and as a consequence has been accused of misguiding economic policy. We identify as the Achilles heel of the formalism its least constrained component, namely the concept of utility. This concept was introduced as an additional degree of freedom in the 18th century when it was noticed that previous models of decision-making failed in many realistic situations. At the time, only pre-18th century mathematics was available, and a fundamental solution of the problems was impossible. We re-visit the basic problem and resolve it using modern techniques, developed in the late 19th and throughout the 20th century. From this perspective utility functions do not appear as (irrational) psychological re- weightings of monetary amounts but as non-linear transformations that define ergodic observables on non-ergodic growth processes. As a consequence we are able to interpret different utility functions as encoding different non-ergodic dynamics and remove the element of human irrationality from the explanation of basic economic behavior. Special cases were treated in [1]. Here we develop the theory for general utility functions.
    Date: 2018–01
  4. By: Michael Greinecker (University of Graz, Austria); Christopher Kah (University of Innsbruck, Austria)
    Abstract: We formulate a general model and stability notion for two-sided pairwise matching problems with individually insignificant agents. Matchings are formulated as joint distributions over the characteristics of the populations to be matched. These characteristics can be high-dimensional and need not be included in compact spaces. Stable matchings exist with and without transfers and stable matchings correspond exactly to limits of stable matchings for finite agent models. We can embed existing continuum matching models and stability notions with transferable utility as special cases of our model and stability notion. In contrast to finite agent matching models, stable matchings exist under a general class of externalities. This might pave the way for integrating matching problems in other economic models.
    Keywords: Stable matching; Economies in distributional form; Large markets
    JEL: C62 C71 C78
    Date: 2018–01
  5. By: Luca Fiorito; Massimiliano Vatiero
    Abstract: This paper deals with the analysis on adventitious utility—that contains many aspects that are connected to the contemporary debate on positional goods—of the early twentieth century American economist, largely forgotten today, George Pendleton Watkins. According to the author, adventitious utility emerges from a process of social exclusion which can create negative externalities, in the sense that positive consumption of one individual implies negative consumption by another individual. Interestingly, a similar notion of positional competition as a zero-sum game has gained some consensus among contemporary authors (Pagano 1999; Hopkins and Kornienko 2004). In addition, for Watkins striving for adventitious utility does undermine social welfare. Not only it worsens both individual and social well-being by generating social waste, but it also disrupts the integrity of the social fabric. In discussing possible remedies, Watkins pointed out the necessity of a more egalitarian distribution of income and postulated a dichotomy between goods and services possessing adventitious utility and those possessing what he defined as multiple utility. In the latter group Watkins included public goods as well as those dimensions in human consumption that depend on social interaction and can be enjoyed only if shared in community.
    JEL: A14 B15 B41 D01
    Date: 2017–01
  6. By: Hassett, Kevin; Zhong, Weifeng
    Abstract: We develop a model of a prediction market with ambiguity and derive testable implications of the presence of Knightian uncertainty. Our model can explain two commonly observed empirical regularities in betting markets: the tendency for longshots to win less often than odds would indicate and the tendency for favorites to win more often. Using historical data from Intrade, we further present empirical evidence that is consistent with the predicted presence of Knightian uncertainty. Our evidence also suggests that, even with information acquisition, the Knightian uncertainty of the world may be not "learnable" to the traders in prediction markets.
    Keywords: ambiguity, Knightian uncertainty, prediction market, maxmin preferences
    JEL: C53 D81 G13
    Date: 2017–10–03
  7. By: Olfa Draouil; Bernt {\O}ksendal
    Abstract: We consider the problem of optimal inside portfolio $\pi(t)$ in a financial market with a corresponding wealth process $X(t)=X^{\pi}(t)$ modelled by \begin{align}\label{eq0.1} \begin{cases} dX(t)&=\pi(t)X(t)[\alpha(t)dt+\beta(t)dB(t)]; \quad t\in[0, T] X(0)&=x_0>0, \end{cases} \end{align} where $B(\cdot)$ is a Brownian motion. We assume that the insider at time $t$ has access to market information $\varepsilon_t>0$ units ahead of time, in addition to the history of the market up to time $t$. The problem is to find an insider portfolio $\pi^{*}$ which maximizes the expected logarithmic utility $J(\pi)$ of the terminal wealth, i.e. such that $$\sup_{\pi}J(\pi)= J(\pi^{*}), \text {where } J(\pi)= \mathbb{E}[\log(X^{\pi}(T))].$$ The insider market is called \emph{viable} if this value is finite. We study under what inside information flow $\mathbb{H}$ the insider market is viable or not. For example, assume that for all $t
    Date: 2018–01
  8. By: Gambetti, Luca (Universitat Autonoma de Barcelona); Moretti, Laura (Central Bank of Ireland)
    Abstract: We interpret oil price fluctuations as the result of agents reaction to news about oil market fundamentals. Agents form expectations about future developments in oil production with limited information, and they only observe a noisy signal about its possible changes. We find that a large part of oil price swings is attributable to shocks that do not have any effect on oil production or global demand indexes. The finding is obtained using a VAR with dynamic rotations. We interpret this shock, through the lenses of a simple imperfect information rational expectations framework, as a noise shock in the oil market.
    Keywords: Oil price shocks, Bubbles, Nonfundamentalness, SVAR, Imperfect Information.
    JEL: C32 E32 E62
    Date: 2017–11
  9. By: Protopapas, Panos
    Abstract: We study solutions that choose an interval of alternatives when agents have single-peaked preferences. Similar to Klaus and Storcken (2002), we ordinally extend these preferences over intervals. Loosely speaking, we extend the results of Moulin (1980) to our setting and show that the results of Ching (1997) cannot always be similarly extended. Our main results are the following. First, strategy-proofness and peaks-onliness characterize the class of generalized median solutions. Second, although peaks-onliness cannot be replaced by the "weaker" property of continuity in our first result -as is the case in Ching (1997)- this equivalence is achieved when voter-sovereignty is also required. Finally, if preferences are symmetric and single-peaked, strategy-proofness and voter-sovereignty characterize the class of efficient generalized median solutions.
    Keywords: Social choice, strategy proofness, single peaked preferences, choice correspondences, voting, median solutions
    JEL: D71
    Date: 2018–01–15

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