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on Utility Models and Prospect Theory |
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Issue of 2018‒02‒19
eleven papers chosen by |
| By: | Reto Foellmi; Adrian Jaeggi; Rina Rosenblatt-Wisch |
| Abstract: | Preferences are important when thinking about macroeconomic problems and questions. Differences in preferences might, for example, explain cross-country variations in economic fundamentals.In recent years, differences in preferences across countries and cultures have been studied more frequently, usually concentrating on micro evidence. However, it is an open question as to how differences in average preferences affect the aggregate economy. Coming from a macroeconomic perspective, we test whether preferences stated in Kahneman and Tversky’s prospect theory, namely, reference point dependence and loss aversion, prevail on the aggregate and whether the average degree of loss aversion differs across countries.We find evidence of loss aversion for a broad set of OECD countries, while the average loss aversion clearly differs across these countries. We find little evidence that these differences could be explained by micro evidence. Furthermore, we analyse whether the different degrees of loss aversion correlate with economic fundamentals such as the level of GDP and consumption per capita. We find that indeed loss aversion is negatively correlated with GDP and consumption per capita and positively correlated with consumption smoothing. |
| Keywords: | Preferences, loss aversion, prospect theory, GMM |
| JEL: | E21 O41 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2018-01&r=upt |
| By: | Sylvie Thoron (LIPHA - Laboratoire Interdisciplinaire d'Etude du Politique Hannah Arendt Paris-Est - UPEM - Université Paris-Est Marne-la-Vallée - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12) |
| Abstract: | The theory of social preferences expanded the definition of the utility function in order to reproduce the prosocial behavior observed in experiments. Does this then mean that this is the route towards a positive theory of morality in economics? We do not think so. Our claim is that there is an epistemic contradiction between methodological individualism which assumes that the economic agent's rationality is autonomous from society, and the nature of social consciousness. Therefore, we argue that a positive theory of morality should rely on social mechanisms that could not fit in this framework. We give two examples of lines of research that go in this direction. The first one is drawn from 18th century moral philosophy, this is the approach adopted by Adam Smith in The Theory of Moral Sentiments. The other one is drawn from a very recent domain of research, that of social neuroscience. We show how, in both cases, the objective is not only to understand how moral judgements shape behavior but also to get an understanding of how people form these moral judgements. Smith's thought and recent developments in social neuroscience seem to be mutually illuminating on this second aspect. Smith's model is an essential model of a moral agent embedded in society. The sympathy operator and the impartial spectator find an echo in the way in which social neuroscience tries to understand how emotional and cognitive empathy intermesh. Furthermore, social neuroscience attempts to go further in the understanding of the complex empathy mechanism, by considering it as a learning process. |
| Abstract: | La théorie des préférences sociales a élargi la définition de la fonction d'utilité de façon à pouvoir reproduire le comportement prosocial observé dans les expériences. Cela signifie-t-il pour autant que nous sommes sur la bonne voie vers l’élaboration d’une théorie positive de la morale en économie? Nous considérons, au contraire, qu'il existe une contradiction épistémique entre l'individualisme méthodologique, qui suppose que la rationalité de l'agent économique est autonome par rapport à la société, et la nature d’une conscience sociale. Ainsi, nous montrons qu'une théorie positive de la morale doit reposer sur des mécanismes sociaux qui ne pourraient entrer dans ce cadre. Nous donnons deux exemples de lignes de recherche qui vont dans ce sens. Le premier est tiré de la philosophie morale du 18ème siècle, et il s’agit de l'approche adoptée par Adam Smith dans La Théorie des sentiments moraux. L'autre est tiré d'un domaine de recherche très récent, celui des neurosciences sociales. Nous montrons comment, dans les deux cas, l'objectif est de comprendre non seulement comment les jugements moraux modèlent les comportements, mais aussi la façon dont les gens forment ces jugements moraux. La pensée de Smith et les récents développements en neurosciences sociales semblent s’éclairer mutuellement au sujet de ce second aspect. Le modèle de Smith est un modèle essentiel d'un agent moral encastré dans la société. L'opérateur de sympathie et le spectateur impartial trouvent un écho dans la manière dont les neurosciences sociales cherchent à comprendre comment l'empathie émotionnelle et l’empathie cognitive s’articulent. En outre, les neurosciences sociales tentent d'aller plus loin dans la compréhension du mécanisme complexe de l'empathie, en le concevant comme un processus d'apprentissage. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-01645043&r=upt |
| By: | Oriol Carbonell-Nicolau; Humberto Llavador |
| Abstract: | Carbonell-Nicolau and Llavador (forthcoming) extend the classic result of Jakobsson (1976) and Fellman (1976)—according to which average-rate progressive, and only average-rate progressive income taxes, reduce income inequality—to the case of endogenous income. There it is shown that marginal-rate progressivity—in the sense of increasing marginal tax rates on income—is necessary for tax structures to be inequality reducing, and necessary and sufficient conditions on the social utility function are identified under which progressive and only progressive taxes are inequality reducing. This paper takes a further step and furnishes conditions on primitives under which various subclasses of progressive taxes are inequality reducing. The main results in Carbonell-Nicolau and Llavador (forthcoming) are obtained as particular cases of the more general framework presented here. Restricting the set of taxes allows for larger classes of preferences consistent with inequality reducing income taxation. As an illustration of the results’ practical implications, we provide a precise characterization of the subclass of (progressive) taxes that are inequality reducing for some standard families of preferences. |
| Keywords: | Progressive Taxation, Income inequality, incentive effects of taxation |
| JEL: | D63 D71 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1015&r=upt |
| By: | Tolulope Fadina; Thorsten Schmidt |
| Abstract: | We introduce the concept of no-arbitrage in a credit risk market under ambiguity considering an intensity-based framework. We assume the default intensity is not exactly known but lies between an upper and lower bound. By means of the Girsanov theorem, we start from the reference measure where the intensity is equal to $1$ and construct the set of equivalent martingale measures. From this viewpoint, the credit risky case turns out to be similar to the case of drift uncertainty in the $G$-expectation framework. Finally, we derive the interval of no-arbitrage prices for general bond prices in a Markovian setting. |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1801.10498&r=upt |
| By: | Hunt Allcott; Benjamin Lockwood; Dmitry Taubinsky |
| Abstract: | An influential result in modern optimal tax theory, the Atkinson and Stiglitz (1976) theorem, holds that for a broad class of utility functions, all redistribution should be carried out through labor income taxation, rather than differential taxes on commodities or capital. An important requirement for that result is that commodity taxes are known and fully salient when consumers make income-determining choices. This paper allows for the possibility consumers may be inattentive to (or unaware of) some commodity taxes when making choices about income. We show that commodity taxes are useful for redistribution in this setting. In fact, the optimal commodity taxes essentially follow the classic “many person Ramsey rule” (Diamond 1975), scaled by the degree of inattention. As a result, to the extent that commodity taxes are not (fully) salient, goods should be taxed when they are less elastically consumed, and when they are consumed primarily by richer consumers. We extend this result to the setting of corrective taxes, and show how nonsalient corrective taxes should be adjusted for distributional reasons. |
| JEL: | H21 H23 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24233&r=upt |
| By: | Jan Hausfeld; Sven Resnjanskij |
| Abstract: | We investigate the trade-off between the costs of decisions and their quality in a simple model in which a decision maker trades off using time for arriving at a risky decision and for pursuing an alternative activity. When decision time increases the quality of the decision, rational agents consider the opportunity cost of time when deciding how much time to allocate to decision-making. In a lab experiment, we introduce exogenous variation in the opportunity costs of time allocated to making risky decisions by reducing the subjects’ payoffs as decision time increases. Using structural estimations, we infer preferences and decision errors. We find that an increase in the opportunity cost of time reduces, ceteris paribus, decision time, and that reducing the time available for making decisions increases the probability of mistakes. Moreover, we show that using more time when making small-stake decisions does not necessarily indicate irrational behavior, and neither does a positive correlation between decision time and the probability of making mistakes. Such behavior is compatible with our model of rational decision-making. |
| Keywords: | decision under risk, time constraints, opportunity costs, rational behavior, lab experiment, structural estimation |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:twi:respas:0108&r=upt |
| By: | Söhnke M. Bartram; Gregory W. Brown; René M. Stulz |
| Abstract: | Since 1965, average idiosyncratic risk (IR) has never been lower than in recent years. In contrast to the high IR in the late 1990s that has drawn considerable attention in the literature, average market-model IR is 44% lower in 2013-2017 than in 1996-2000. Macroeconomic variables help explain why IR is lower, but using only macroeconomic variables leads to large prediction errors compared to using only firm-level variables. As a result of the dramatic change in the number and composition of listed firms since the late 1990s, listed firms are larger and older. Larger and older firms have lower idiosyncratic risk. Models that use firm characteristics to predict firm-level idiosyncratic risk estimated over 1963-2012 can largely or completely explain why IR is low over 2013-2017. The same changes that bring about historically low IR lead to unusually high market-model R-squareds. |
| JEL: | G10 G11 G12 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24270&r=upt |
| By: | Been-Lon Chen (Institute of Economics, Academia Sinica, Taipei, Taiwan); Shun‐Fa Lee (Department of Industrial Economics, Tamkang University); Xavier Raurich (Departament d’Economia, Universitat de Barcelona) |
| Abstract: | This paper studies an infinite‐horizon two‐sector growth model with sector‐specific externalities and preferences that are non‐separable between consumption and leisure. We find two main results. First, a larger income effect on the labor supply increases the possibility of macroeconomic instability. Second, a larger elasticity of the labor supply may increase or decrease the possibility of aggregate instability, depending on the intensity of the income effect. |
| Keywords: | : Indeterminacy, non‐separable preferences, income effect, labor supply elasticity |
| JEL: | E3 O41 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:sin:wpaper:18-a002&r=upt |
| By: | Lustenhouwer, Joep; Mavromatis, Kostas |
| Abstract: | We analyze fiscal consolidations using a New-Keynesian model where agents have finite planning horizons and are uncertain about the future state of the economy. Both consumers and firms are infinitely lived, but only plan and form expectations up to a finite number of periods into the future. The length of agents' planning horizons plays an important role in determining how spending cuts or tax increases affect output and inflation. We find that for low degrees of relative risk aversion spending-based consolidations are less costly in terms of output losses, in line with empirical evidence. A stronger response of monetary policy to inflation makes spending-based consolidations more favorable as well. Interestingly, for short planning horizons, our model captures the positive comovement between private consumption and government spending observed in the data. |
| Keywords: | Fiscal policy,Finite planning horizons,Bounded rationality |
| JEL: | E60 E62 E63 H63 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bamber:130&r=upt |
| By: | Madjid Eshaghi Gordji; Gholamreza Askari |
| Abstract: | The rational choice theory is based on this idea that people rationally pursue goals for increasing their personal interests. In most conditions, the behavior of an actor is not independent of the person and others' behavior. Here, we present a new concept of rational choice as hyper-rational choice which in this concept, the actor thinks about profit or loss of other actors in addition to his personal profit or loss and then will choose an action which is desirable to him. We implement the hyper-rational choice to generalize and expand the game theory. Results of this study will help to model the behavior of people considering environmental conditions, the kind of behavior interactive, valuation system of itself and others and system of beliefs and internal values of societies. Hyper-rationality can provide a common research language between psychologists and economists, and it helps us understand how human decision makers behave in interactive decisions. |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1801.10520&r=upt |
| By: | Hommes, Cars H.; Lustenhouwer, Joep; Mavromatis, Kostas |
| Abstract: | We analyze fiscal consolidations using a New Keynesian model where agents have heterogeneous expectations and are uncertain about the composition of consolidations. We look at spending-based and tax-based consolidations and analyze their effects separately. We find that the effects of consolidations and the output multipliers are sensitive to heterogeneity in expectations before and after implementation of a specific fiscal plan. Depending on the beliefs about the type of consolidation prior to implementation, we show that heterogeneity in expectations may lead to optimism in the economy, improving thus the performance of a specific fiscal plan, or can work towards the opposite direction leading to pessimism, amplifying the contractionary effects of the consolidation. In general, we find that spending-based consolidations last longer and lead to deeper recessions when agents are boundedly rational compared to the rational expectations benchmark, while the opposite holds for tax-based consolidations. |
| Keywords: | fiscal policy,uncertainty,heterogeneous expectations,bounded rationality |
| JEL: | H60 D83 E32 E62 E63 H30 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bamber:132&r=upt |