|
on Utility Models and Prospect Theory |
|
Issue of 2018‒04‒02
28 papers chosen by |
| By: | Sanjit Dhami; Ali al-Nowaihi |
| Abstract: | We examine the various senses in which economist use the term “rationality” and then outline some of the commonly drawn implications and auxiliary assumptions. Finally, we confront the implications with the empirical evidence, drawing on the insights from the exciting new field of behavioral economics. |
| Keywords: | rationality, self-regarding preferences, efficient markets, heuristics, optimization |
| JEL: | B40 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6872&r=upt |
| By: | Rohit Lamba (Penn State University); Ilia Krasikov (Penn State University) |
| Abstract: | We study a dynamic principal-agent model where the agent has access to a persistent private technology but is strapped for cash. Financial constraints are generated by the periodic interaction between incentives (private information) and feasibility (being strapped for cash).This interaction produces dynamic distortions that are a sum of two effects: backloading of incentives and illiquidity. Bad technology shocks increase distortions and monotonically push the agent further away from efficiency. An endogenous number of good shocks is required for the agent to become liquid, and eventually for the contract to become efficient. Efficiency is an absorbing state that is reached almost surely. The optimal allocation can be implemented through a mechanism which is precisely pinned down by a dynamic information operator. The shares of principal and agent in the net present value of economic surplus are endogenous to the evolution of technology shocks. Surplus itself is increasing in the share of the agent, and in his type contingent utility spread. By comparing the agent’s utility with and without financial constraints, the model provides a foundation for the usefulness of limited liability in dynamic contracts |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1544&r=upt |
| By: | Nicole El Karoui (LPMA - Laboratoire de Probabilités et Modèles Aléatoires - UPMC - Université Pierre et Marie Curie - Paris 6 - UPD7 - Université Paris Diderot - Paris 7 - CNRS - Centre National de la Recherche Scientifique); Caroline Hillairet (ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique); Mohamed Mrad (LAGA - Laboratoire Analyse, Géométrie et Applications - UP8 - Université Paris 8, Vincennes-Saint-Denis - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - Institut Galilée - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | The aim of this paper is to describe globally the behavior and preferences of heterogeneous agents. Our starting point is the global wealth of the economy, with a given repartition of the wealth among investors, which is not necessarily Pareto optimal. We propose a construction of an aggregate forward utility, market consistent, that aggregates the marginal utility of the heterogeneous agents. This construction is based on the aggregation of the pricing kernels of each investor. As an application we analyze the impact of the heterogeneity and of the global wealth market on the yield curve. |
| Keywords: | yield curve,heterogeneous preferences,market-consistent progressive utility,Utility aggregation |
| Date: | 2018–03–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01721441&r=upt |
| By: | Jean-Paul Chavas; Martina Menon; Elisa Pagani; Federico Perali |
| Abstract: | We investigate the relationship between the individual and household indirect utility functions in the context of a collective household model. Our analysis produces new results that explain how the rule governing the distribution of resources among household members is related to the measurement of household welfare and intra-household inequality. We show that in a collective model of private consumption, income shares are equal to the product of two weights: the Pareto weight and a distribution weight reflecting income effects across individuals. For a weighted Bergsonian representation of household utility and general assumptions about individual preferences, we derive the associated household welfare functions and intra-household inequality measures belonging to a family of entropy indexes. We illustrate our findings with an empirical application that estimates a collective demand system to recover associated individual and household welfare functions along with the measures of intra-household inequality. This is the first application that estimates the Pareto weight and examines its role within a measure of income dispersion among household members. |
| Keywords: | Collective household model, Sharing rule, Household welfare, Intra-household inequality, Theil index. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wchild:56&r=upt |
| By: | Kim, Kyunghun (Korea Institute for International Economic Policy); Kim, Soyoung (Seoul National University); Yang, Da Young (Korea Institute for International Economic Policy); Kang, Eunjung (Korea Institute for International Economic Policy) |
| Abstract: | Financial market integration mitigates production shocks that occur in a country by pooling the risk through portfolio diversification and this contributes to consumption smoothing for life-time utility maximization. Financial market integration also contributes to economic growth by supplying capital to developing countries via the integrated financial market. However, the integrated financial market also serves as a transition channel where the financial shock which originated from the center country spreads to its neighboring economies. In the event of a financial crisis, there is a potential risk of capital flight from neighboring countries to the financial center, meaning that many countries in the integrated financial market have an economic structure that is vulnerable to external shocks. As the uncertainties in the international financial market increased significantly during the financial crisis, financial variables such as asset prices, leverage, credit growth, and capital flows in many countries were heavily affected by global financial market sentiments rather than their own monetary policies. This is evidence supporting that many countries in the global financial market have constrained monetary policies. In this report, we try to understand how monetary policy is constrained in the context of the international financial market, from which we can derive relevant policy implications. To this end we analyze how monetary policies are restricted by introducing the concept of monetary policy independence. |
| Keywords: | Financial Market Integration; Monetary Policy |
| Date: | 2018–03–09 |
| URL: | http://d.repec.org/n?u=RePEc:ris:kiepwe:2018_011&r=upt |
| By: | Buss, Adrian; Schönleber, Lorenzo; Vilkov, Grigory |
| Abstract: | We show that the correlation risk premium can predict future market excess returns in-sample and out-of-sample for long horizons and contains information that is non-redundant relative to the variance risk premium. To exploit this predictability, we develop a novel estimation methodology that uses contemporaneous increments of option-implied variables, efficiently removing any lag in estimation of variance and correlation risk betas. The methodology leads to considerable out-of-sample predictability, with an R2 of 7.0% at an annual horizon, and substantial economic gains for investors. The results are supported by a multi-asset general-equilibrium model in which variance and correlation risk are endogenously priced. |
| Keywords: | correlation risk premium; diversification}; option-implied information; out-of-sample return predictability |
| JEL: | G11 G12 G13 G17 |
| Date: | 2018–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12760&r=upt |
| By: | José M. Gaspar (FEP, University of Porto. Católica Porto Business School, Universidade Católica Portuguesa.); Sofia B.S.D. Castro (CMUP and Faculty of Economics, University of Porto); João Correia-da-Silva (CEF.UP and Faculty of Economics, University of Porto) |
| Abstract: | We study the long-run spatial distribution of industry using a multi-region core-periphery model with quasi-linear log utility (Pflüger, 2004). We show that a distribution in which industry is evenly dispersed among some of the regions while the other regions have no industry cannot be stable. A spatial distribution where industry is evenly distributed among all regions except one can be stable, but only if that region is significantly more industrialized than the other regions. When trade costs decrease, the type of transition from dispersion to agglomeration depends on the fraction of workers that are mobile. If this fraction is low, the transition from dispersion to agglomeration is catastrophic once dispersion becomes unstable. If it is high, there is a discontinuous jump to partial agglomeration in one region and then a smooth transition until full agglomeration. Finally, we find that mobile workers benefit from more agglomerated spatial distributions whereas immobile workers prefer more dispersed distributions. The economy as a whole shows a tendency towards over-agglomeration for intermediate levels of trade costs. |
| Keywords: | Core-periphery model, Footloose Entrepreneur, Multiple regions, Welfare |
| JEL: | R10 R12 R23 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:591&r=upt |
| By: | Daria Pignalosa |
| Abstract: | Within the modern mainstream theory of consumption, the main characteristics of individual preferences are represented by a definite set of parameters: risk aversion, prudence, and the elasticity of intertemporal substitution. To give quantitative definition to each of these parameters is crucial, but the results of the empirical literature are controversial. Among the reasons for this failure, a possible, neglected role may have been played by the need to specify a utility function to perform the estimation. This paper presents a number of simulation exercises, which show that the same saving behaviour can be associated with quite different values of the preference parameters depending on the utility function adopted. The analysis suggests that the research devoted to estimating preference parameters has been affected by the constraints imposed, on the one hand, by the quantitative definition of the parameters, and, on the other, by the utility functions adopted. |
| Keywords: | Consumption; Elasticity of Intertemporal Substitution; Risk Aversion; Precau-tionary Saving; Utility function |
| JEL: | D12 D81 |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:rtr:wpaper:0235&r=upt |
| By: | Huy N. Chau; Miklos Rasonyi |
| Abstract: | We consider a continuous-time market with proportional transaction costs. Under appropriate assumptions we prove the existence of optimal strategies for investors who maximize their worst-case utility over a class of possible models. We consider utility functions defined either on the positive axis or on the whole real line. |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1803.04213&r=upt |
| By: | Gregory Cox |
| Abstract: | This paper provides a theorem for the set of global minimizers, the argmin, of a random objective function to be unique almost surely. The usual way to get uniqueness is to assume the function is strictly quasiconvex and the domain is convex. Outside of a few special cases, verifying uniqueness without convexity has not been done and is often just assumed. The main result of this paper establishes uniqueness without assuming convexity by relying on an easy-to-verify nondegeneracy condition. The main result of this paper has widespread application beyond econometrics. Six applications are discussed: uniqueness of M-estimators, utility maximization with a nonconvex budget set, uniqueness of the policy function in dynamic programming, envelope theorems, limit theory in weakly identified models, and functionals of Brownian motion. |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1803.02415&r=upt |
| By: | Stefania Garetto (Boston University); Jose Fillat (Federal Reserve Bank of Boston) |
| Abstract: | We examine more than 2,500 mergers that involve a US acquirer and a foreign target since 2001. Our analysis focuses on the comparison of the risk premium of US firms before and after they acquire a foreign firm for the first time. The objective of this study is to understand how foreign direct investment dynamics affect the risk premium of the acquiring firm by focusing on the merger event. In addition, our empirical analysis explores the characteristics of foreign investment that have a positive impact on risk premium. While there is strong evidence of the existence of a multinational risk premium, our analysis of firms' initial investment abroad shows that risk premia increase as the dates of announcement and completion of the deal approach. The risk premium in the quarters before announcement is significantly higher than the risk premium after the announcement and completion of the deal. This analysis motivates the construction of a model where firms' endogenous decisions to merge and agents' expectations generate a risk premium over firms that remain domestic only. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1546&r=upt |
| By: | Hector Chade (Arizona State University) |
| Abstract: | This paper analyzes a canonical principal-agent problem with moral hazard and adverse selection. The agent is risk averse and has private information about his disutility of taking an unobservable action. The principal is risk neutral and designs a menu of contracts consisting of a compensation scheme and a recommended action for each type of agent to maximize expected profit. We first derive a set of sufficient conditions for menus to be feasible (i.e., satisfy participation and incentive compatibility). Then we provide a method of solution, decoupling, consisting of first solving a cost minimization problem for a pure moral hazard problem for each type, action, and utility level of the agent, and then using the resulting cost function to solve a suitable adverse selection problem. This relaxed problem is both tractable and delivers a candidate solution for the original problem. We show several classes of primitives under which this candidate solution is in fact feasible and hence optimal. We also describe several properties that optimal menus exhibit when decoupling is valid. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1537&r=upt |
| By: | Marcelo Veracierto (Federal Reserve Bank of Chicago) |
| Abstract: | I consider a real business cycle model in which agents have private information about their stochastic value of leisure. For the case of logarithmic preferences I provide an analytical characterization of the solution to the associated mechanism design problem. Moreover, I show a striking irrelevance result: That the stationary behavior of all aggregate variables are exactly the same in the private information economy as in the full information case. I then introduce a new computational method to show that the irrelevance result holds numerically for more general CRRA preferences. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1574&r=upt |
| By: | Mrad Mohamed (LAGA - Laboratoire Analyse, Géométrie et Applications - UP8 - Université Paris 8, Vincennes-Saint-Denis - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - Institut Galilée - CNRS - Centre National de la Recherche Scientifique); N. El Karoui (LPMA - Laboratoire de Probabilités et Modèles Aléatoires - UPMC - Université Pierre et Marie Curie - Paris 6 - UPD7 - Université Paris Diderot - Paris 7 - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | The purpose of this paper is to develop an explicit construction of consistent utilities, using the stochastic flows approach developed in [KM13] and [KM16]. Starting from a family of utility functions indexed by some parameter α (for example the risk aversion of different agents), the idea is to randomize α and construct a non standard stochastic utilities processes. Two approach are developed, the first one consists to built directly from the class {U α , α ∈ R} a global one U as a sup-convolution. The second approach which is very different, consists to define from a class (X α , Y α) α∈R of monotonic processes a global pair (X * , Y *) as a mixture. The non standard stochastic utility is then obtained by composing stochastic flows and interpreted as the aggregate utility of all considered agents . |
| Date: | 2018–03–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01728554&r=upt |
| By: | Shuichi Tsugawa; Takuya Obara |
| Abstract: | We examine optimal taxation and public good provision by a government which takes reduction of envy into consideration as one of the constraints. We adopt the notion of extended envy freeness proposed by Diamantaras and Thomson (1990), called equitability. We derive the modified Samuelson rule at an optimum income tax, and show that, using a constant elasticity of substitution utility function, the direction of distorting the original Samuelson rule to relax envy free constraints is crucially determined by the elasticity of substitution. Furthermore, we numerically show that the level of public good increases (or decreases) in the degree of envy-freeness when the provision level is upwardly (or downwardly) distorted. |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:tcr:wpaper:e117&r=upt |
| By: | Laura Cornelsen (London School of Hygiene and Tropical Medicine, Fac. Public Health and Policy); Mario Mazzocchi (University of Bologna, Dept. Statistical Sciences); Richard Smith (London School of Hygiene and Tropical Medicine, Fac. Public Health and Policy) |
| Abstract: | Canonical demand studies and fiscal policy simulations rest on the assumption that consumers react symmetrically to price increases and decreases. We propose a theoretically consistent demand system which allows for asymmetric response by incorporating reference prices into both own- and cross-prices. Applying the system to a large and detailed home-scan household-level data-set with food prices and purchases from Great Britain, we show evidence on asymmetric consumer response and loss aversion, with a stronger response when prices rise above their reference level. Results are robust to changes in the price definition and model speci cation, and a simulation shows that ignoring asymmetry may lead to important biases. |
| Keywords: | Reference Price, Price Elasticities, Demand System, Food Prices, Loss Aversion |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:bot:quadip:wpaper:139&r=upt |
| By: | Peijnenburg, J.M.J. (Tilburg University, School of Economics and Management); Nijman, Theo (Tilburg University, School of Economics and Management); Werker, Bas (Tilburg University, School of Economics and Management) |
| Abstract: | We find that health cost risk lowers optimal annuity demand at retirement. If medical expenses can be sizeable early in retirement, full annuitisation at retirement is no longer optimal because agents do not have enough time to build a liquid wealth buffer. Furthermore, large deviations from optimal annuitisation levels lead to small utility differences. Our results suggest that health cost risk can explain a large proportion of empirically observed annuity choices. Finally, allowing additional annuitisation after retirement results in welfare gains of at most 2.5% when facing health cost risk, and negligible gains without this risk. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiutis:257e76c9-54bb-4103-bd26-95d15a6141f0&r=upt |
| By: | Christopher D. Carroll; Edmund Crawley; Jiri Slacalek; Kiichi Tokuoka; Matthew N. White |
| Abstract: | Macroeconomic models often invoke consumption “habits” to explain the substantial persistence of aggregate consumption growth. But a large literature has found no evidence of habits in microeconomic datasets that measure the behavior of individual households. We show that the apparent conflict can be explained by a model in which consumers have accurate knowledge of their personal circumstances but ‘sticky expectations’ about the macroeconomy. In our model, the persistence of aggregate consumption growth reflects consumers’ imperfect attention to aggregate shocks. Our proposed degree of (macro) inattention has negligible utility costs, because aggregate shocks constitute only a tiny proportion of the uncertainty that consumers face. |
| JEL: | D83 D84 E21 E32 |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24377&r=upt |
| By: | Anwesha Banerjee (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Nicolas Gravel (CSH - Centre de sciences humaines de New Delhi - MEAE - Ministère de l'Europe et des Affaires étrangères - CNRS - Centre National de la Recherche Scientifique, AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | This paper examines how voluntary contributions to a public good are affected by the contributors’ heterogeneity in beliefs about the uncertain impact of their contributions. It assumes that contributors have Savagian preferences that are represented by a two-state-dependent expected utility function and different beliefs about the benefit that will result from the sum of their contributions. Under some conditions imposed on preferences, we establish general comparative static results on the effect of specific changes in the distribution of beliefs on the (Nash) equilibrium provision of public good. We specifically shows that the equilibrium public good provision is increasing with respect to first-order and second order stochastic dominance changes in the distribution of beliefs. |
| Keywords: | voluntary provision, public good, uncertainty, beliefs, optimism, consensus |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01734745&r=upt |
| By: | Gilles Joseph (LC2S - Laboratoire caribéen de sciences sociales - CNRS - Centre National de la Recherche Scientifique - UA - Université des Antilles); Paul-Emile Maingé (LAMIA - Laboratoire de Mathématiques Informatique et Applications - UAG - Université des Antilles et de la Guyane) |
| Abstract: | This paper studies the optimal duration of unemployment insurance (UI) benefits in a basic job search model where a risk neutral UI agency can not monitor the search effort of risk-averse workers. Social assistance payments are taken as exogenous by the unemployment agency which chooses optimally the level of UI benefits, the date of their exhaustion and the level of the financing tax. So, due to possible finite values of the duration of unemployment benefits, the resulting agency's problem brings nonstationarity complexities that are usually deemed intractable in models where utility and search costs functions are nonlinear. We then propose a new strategy, based on the study of the geometric properties of the set of constraints, and explicit formal conditions, with very general utility and search costs functions , for obtaining a zero, positive or infinite optimal duration of UI. |
| Keywords: | Moral hazard,Job search,Potential benefits duration,Unemployment insurance |
| Date: | 2018–03–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01722116&r=upt |
| By: | Pedro Silos (Temple University); German Cubas (University of Houston) |
| Abstract: | Occupations differ in their degree of earnings uncertainty. Progressive taxation provides insurance to risk-averse workers against adverse earnings outcomes. As a result, progressive tax systems distort the price of risk and influence the mo- bility and sorting of workers across occupations. This paper proposes a theory to understand the effect of the degree of tax progressivity on workers’ career choices when markets are incomplete. We quantify the distortion and we find that tax progressivity incentives young workers to take on risk, thus partially completing the insurance markets. Hence, we provide a new perspective on the welfare cost of uninsurable earnings risk. To that end, we employ micro-data on occupational mobility and earnings from the United States and Germany to estimate a model of occupational choice and uninsurable earnings uncertainty. The model predicts that, as observed in the data, everything else equal, were US workers to face the relatively more progressive earnings tax function of Germany, a larger fraction of young workers will take risk and they will end up working into safer occupations. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1581&r=upt |
| By: | Jakobsen, Katrine; Jakobsen, Kristian; Kleven, Henrik; Zucman, Gabriel |
| Abstract: | Using administrative wealth records from Denmark, we study the effects of wealth taxes on wealth accumulation. Denmark used to impose one of the world's highest marginal tax rates on wealth, but this tax was drastically reduced and ultimately abolished between 1989 and 1997. Due to the specific design of the wealth tax, these changes provide a compelling quasi- experiment for understanding behavioral responses among the wealthiest segments of the population. We find clear reduced-form effects of wealth taxes in the short and medium run, with larger effects on the very wealthy than on the moderately wealthy. We develop a simple lifecycle model with utility of residual wealth (bequests) allowing us to interpret the evidence in terms of structural primitives. We calibrate the model to the quasi-experimental moments and simulate the model forward to estimate the long-run effect of wealth taxes on wealth accumulation. Our simulations show that the long-run elasticity of wealth with respect to the net-of-tax return is sizeable at the top of distribution. Our paper provides the type of evidence needed to assess optimal capital taxation. |
| JEL: | E2 E6 H2 H3 |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12780&r=upt |
| By: | Nicolas Baradel (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique, ENSAE - Ecole Nationale de la Statistique et de l'Analyse Economique - Ecole Nationale de la Statistique et de l'Analyse Economique); Bruno Bouchard (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique, PSL - PSL Research University); David Evangelista (KAUST - King Abdullah University of Science and Technology); Othmane Mounjid (CMAP - Centre de Mathématiques Appliquées - Ecole Polytechnique - Polytechnique - X - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | We model the behavior of three agent classes acting dynamically in a limit order book of a financial asset. Namely, we consider market makers (MM), high-frequency trading (HFT) firms, and institutional brokers (IB). Given a prior dynamic of the order book, similar to the one considered in the Queue-Reactive models [14, 20, 21], the MM and the HFT define their trading strategy by optimizing the expected utility of terminal wealth, while the IB has a prescheduled task to sell or buy many shares of the considered asset. We derive the variational partial differential equations that characterize the value functions of the MM and HFT and explain how almost optimal control can be deduced from them. We then provide a first illustration of the interactions that can take place between these different market participants by simulating the dynamic of an order book in which each of them plays his own (optimal) strategy. |
| Keywords: | Optimal trading,Market impact,Optimal control |
| Date: | 2018–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01710301&r=upt |
| By: | Debjyoti Saharoy; Theja Tulabandhula |
| Abstract: | We propose a new efficient online algorithm to learn the parameters governing the purchasing behavior of a utility maximizing buyer, who responds to prices, in a repeated interaction setting. The key feature of our algorithm is that it can learn even non-linear buyer utility while working with arbitrary price constraints that the seller may impose. This overcomes a major shortcoming of previous approaches, which use unrealistic prices to learn these parameters making them unsuitable in practice. |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1803.01968&r=upt |
| By: | Kocher, Martin G. (University of Vienna, Austria, and Institute for Advanced Studies, Vienna, Austria, and University of Gothenburg, Sweden); Schindler, David (Tilburg University, The Netherlands); Trautmann, Stefan T. (University of Heidelberg, Germany and Tilburg University, The Netherlands); Xu, Yilong (University of Heidelberg, Germany) |
| Abstract: | Time pressure is a central aspect of economic decision making nowadays. It is therefore natural to ask how time pressure affects decisions, and how to detect individual heterogeneity in the ability to successfully cope with time pressure. In the context of risky decisions, we ask whether a person’s performance under time pressure can be predicted by measurable behavior and traits, and whether such measurement itself may be affected by selection issues. We find that the ability to cope with time pressure varies significantly across decision makers, leading to selected subgroups that differ in terms of their observed behaviors and personal traits. Moreover, measures of cognitive ability and intellectual efficiency jointly predict individuals’ decision quality and ability to keep their decision strategy under time pressure. |
| Keywords: | Risk, cognitive ability, selection, time pressure |
| JEL: | C91 D81 |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:ihs:ihsesp:339&r=upt |
| By: | Mohamed Belhaj (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université - EHESS - École des hautes études en sciences sociales); Frédéric Deroïan (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université - EHESS - École des hautes études en sciences sociales) |
| Abstract: | We consider a network game with local complementarities. A policymaker, aiming at minimizing or maximizing aggregate effort, contracts with a single agent on the network to trade effort change against transfer. The policymaker has to find the best agent and the optimal contract to offer. Our study shows that for all utilities with linear best-responses, it only takes two statistics about the position of each agent on the network to identify the key player: the Bonacich centrality and a weighted measure of the number of closed walks originating from the agent. We also characterize key players under linear quadratic utilities for various contractual arrangements. |
| Keywords: | key player,network,linear interaction,incentives,contract,limited budget |
| Date: | 2018–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01699849&r=upt |
| By: | Bruno Bouchard (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique, PSL - PSL Research University); Johannes Muhle-Karbe (University of Michigan [Ann Arbor]) |
| Abstract: | Using elementary arguments, we derive Lp-error bounds for the approximation of frictionless wealth process in markets with proportional transaction costs. For utilities with bounded risk aversion, these estimates yield lower bounds for the frictional value function, which paves the way for its asymptotic analysis using stability results for viscosity solutions. Using tools from Malliavin calculus, we also derive simple sufficient conditions for the regularity of frictionless optimal trading strategies, the second main ingredient for the asymptotic analysis of small transaction costs. |
| Keywords: | Transaction costs, Utility maximization, Asymptotic analysis |
| Date: | 2018–02–17 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01711371&r=upt |
| By: | Ali Shourideh (Carnegie Mellon University); Roozbeh Hosseini (University of Georgia) |
| Abstract: | Recent evidence, as illustrated by Autor et al. (2013) as well as Caliendo et al. (2015), suggests that international trade and global reallocation of production has contributed to domestic reallocation of labor and income inequality. In this paper, we explore the relationship between optimal trade and redistributive policies. In particular, in an environment where international trade affects the relative wages and the allocation of labor across various sectors, we study how taxes and tariffs should be designed in order to balance the efficiency gains from trade with the costs associated with the resulting increased inequality. To do so, we use a two-country Ricardian model of trade which can be thought of as a generalized version of the model developed by Caliendo et al. (2015). More specifically, each country is consisted of many competitive sectors. Workers choose their occupation modeled as a multinomial logit model and the intensity of their work effort in the chosen sector. Accordingly, the multinomial logit captures the idea that different workers have different costs and benefits of working in each sector and yet retains significant tractability in the framework. We assume that countries differ in their comparative advantages across different sectors as well the composition of their work force in terms of their cost of their sectoral choice. We are interested in government policies that are in the form of linear tariffs on imports and exports as well general income taxes. We solve the optimal taxation problem of the world in which all governments coordinate. This can be viewed, for example, as a binding international trade agreement that maximizes welfare of all individuals in all countries and aims at a comprehensive overhaul of tariffs and income taxes. We first show that if governments have access to sector-specific transfers, tax and transfers that depend on workers' sectors, then optimal tariff should be zero. This result is independent of the choice of utility function and social welfare function. Opening to trade, changes the distribution of wages across sectors and increases income inequality. If sector-specific transfers exist, they can be used to completely offset this effect on income without affecting the trade in goods. Hence, government can achieve its desired goal without tariffs. We next turn our attention to a more realistic setup in which governments do not have access to sector-specific transfers. We assume that fiscal policy instruments are incomplete to the extent that they only depend on income (and not other characteristics such as occupation, etc.). This features leads to existence of a deadweight loss from taxation which in turn depends on the distribution of wages in the economy. Since tariffs affect the distribution of wages, they can be efficiently used to lower the deadweight loss of taxation. As a result, optimal trade policy leads to non-zero tariffs even when countries can coordinate their policies. We use our framework characterizes the key determinants of optimal tariffs: comparative advantage, sectoral productivities, as well as the elasticity of sectoral choice in each country. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1553&r=upt |