
on Utility Models and Prospect Theory 
By:  Robert Becker (Indiana University); Juan Pablo RinconZapatero (Univesidad Carlos III de Madrid) 
Abstract:  We reconsider the theory of Thompson aggregators proposed by Marinacci and Montrucchio [34]. We prove a variant of their Recovery Theorem establishing the existence of extremal solutions to the Koopmans equation. We apply the constructive TarskiKantorovich Fixed Point Theorem rather than the nonconstructive Tarski Theorem employed in [34]. We also obtain additional properties of the extremal solutions. The Koopmans operator possesses two distinct order continuity properties. Each is sufficient for the application of the TarskiKantorovich Theorem. One version builds on the order properties of the underlying vector spaces for utility functions and commodities. The second form is topological. The Koopmans operator is continuous in Scott's [40] induced topology. The least fixed point is constructed with either continuity hypothesis by the partial sum method. This solution is a concave function whenever the Thompson aggregator is concave and also norm continuous on the interior of its effective domain. 
Keywords:  Recursive Utility, Thompson Aggregators, Koopmans Equation, Koopmans operator, Order Continuity, TarskiKantorovich Fixed 
Date:  2018–07 
URL:  http://d.repec.org/n?u=RePEc:inu:caeprp:2018006&r=upt 
By:  Geoffroy de Clippel; Kareen Rozen 
Abstract:  Incorporating bounded rationality into the classic consumer theory setting, we study the testable implications of a consumer who may have trouble consistently assessing her subjective tastes. Our model of eRationalizability, which bounds the consumer’s misperception of her marginal rates of substitution, may arise from various choice heuristics. It also offers a natural, preferencebased measure of departure from rationality that is more demanding than Afriat’s measure. 
Date:  2018 
URL:  http://d.repec.org/n?u=RePEc:bro:econwp:201810&r=upt 
By:  Kukushkin, Nikolai S. 
Abstract:  Several agents choose positions on the real line (e.g., their levels of conspicuous consumption). Each agent's utility depends on her choice and her "status," which, in turn, is determined by the number of agents with greater choices (the fewer, the better). If the rules for the determination of the status are such that the set of the players is partitioned into just two tiers ("top" and "bottom"), then a strong Nash equilibrium exists, which Pareto dominates every other Nash equilibrium. Moreover, the Cournot tatonnement process started anywhere in the set of strategy profiles inevitably reaches a Nash equilibrium in a finite number of steps. If there are three tiers ("top," "middle," and "bottom"), then the existence of a Nash equilibrium is ensured under an additional assumption; however, there may be no Pareto efficient equilibrium. With more than three possible status levels, there seems to be no reasonably general sufficient conditions for Nash equilibrium existence. 
Keywords:  status game; strong equilibrium; Nash equilibrium; Cournot tatonnement 
JEL:  C72 
Date:  2018–06–28 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:87635&r=upt 
By:  Weiwei Tasch; Daniel Houser 
Abstract:  Over the last two decades social preferences have been implicated in a wide variety of key economic behaviors. Here we investigate connections between social preferences and the demand for information about others’ economic decisions and outcomes, which we denote “social curiosity.” Our analysis is within the context of the inequality aversion model of Fehr and Schmidt (1999). Using data from laboratory experiments with sequential public goods games, we estimate social preferences at the individual level, and then correlate social preferences with one’s willingness to pay to make visible others’ contribution decisions. Our investigation enables us to shed light on how costs to knowing others’ economic decisions and outcomes impact decisions among people with different social preferences, and in particular the extent to which such costs impact the willingness for groups to cooperate. 
Keywords:  laboratory experiment, curiosity, inequality aversion, sequential public goods game 
JEL:  C91 H41 
Date:  2018 
URL:  http://d.repec.org/n?u=RePEc:ces:ceswps:_7132&r=upt 
By:  Bolin, Kristian (Department of Economics, School of Business, Economics and Law, Göteborg University); Caputo, Michael R. (Department of Economics University of Central Florida) 
Abstract:  A healthcapital model is contemplated which accounts for the consumption of many goods, a stock of health and investment in it, as well as an agent’s random lifetime and accumulation of wealth. It is shown that if an agent maximizes the expected discounted value of lifetime utility, or if an agent maximizes the expected value of their lifetime, then an agent does not follow the healthinvestment policy that minimizes the conditional probability of dying at each point in time, in general. What is more, simple and intuitive sufficient, and necessary and sufficient, conditions are identified whereby such agents investment more or less in their health than said policy. 
Keywords:  health capital; health investment; optimal control; random lifetime 
JEL:  C61 D11 I12 
Date:  2018–08 
URL:  http://d.repec.org/n?u=RePEc:hhs:gunwpe:0734&r=upt 
By:  JeanBaptiste Michau; Yoshiyasu Ono; Matthias Schlegl 
Abstract:  We consider a neoclassical economy where households derive utility from holding wealth. We show that, under some conditions, there can be rational bubbles. Hence, we provide a microfoundation for bubbles that relies on a frictionless infinitehorizon economy without any heterogeneity across households. While our bubbly equilibria are very similar to those obtained by Tirole (1985) in an overlapping generation economy, the underlying economics is different. Turning to public debt, we show that Ponzi schemes can be sustainable. Hence, in general, the limit on the accumulation of public debt by the government is not given by its noPonzi condition but, instead, by the representative household’s transversality condition. The Ricardian equivalence must hold in any of our equilibria. Finally, in the presence of money, the real equilibrium structure of the economy remains unchanged. We carefully investigate the effects of helicopter drops of money on the possibility of Ponzi schemes and of speculative hyperinflation or deflation. 
Keywords:  Ponzi scheme, rational bubble, wealth preference 
JEL:  E13 E44 G12 
Date:  2018 
URL:  http://d.repec.org/n?u=RePEc:ces:ceswps:_7148&r=upt 
By:  Diane Aubert (PSE  Paris School of Economics, PJSE  Paris Jourdan Sciences Economiques  UP1  Université PanthéonSorbonne  ENS Paris  École normale supérieure  Paris  INRA  Institut National de la Recherche Agronomique  EHESS  École des hautes études en sciences sociales  ENPC  École des Ponts ParisTech  CNRS  Centre National de la Recherche Scientifique); Mireille ChiroleuAssouline (ECOPUB  Economie Publique  INRA  Institut National de la Recherche Agronomique  AgroParisTech, PSE  Paris School of Economics, PJSE  Paris Jourdan Sciences Economiques  UP1  Université PanthéonSorbonne  ENS Paris  École normale supérieure  Paris  INRA  Institut National de la Recherche Agronomique  EHESS  École des hautes études en sciences sociales  ENPC  École des Ponts ParisTech  CNRS  Centre National de la Recherche Scientifique) 
Abstract:  This paper investigates the distributional and efficiency consequences of an environmental tax reform, when the revenue from the green tax is recycled by varying labor tax rates. We build a general equilibrium model with imperfect heterogeneous labor markets, pollution consumption externalities, and nonhomothetic preferences (StoneGeary utility). We show that in the case where the reform appears to be regressive, the gains from the double dividend can be made Pareto improving by using a redistributive nonlinear income tax if redistribution is initially not too large. Moreover, the increase of progressivity acts on unemployment and can moderate the tradeoff between equity and efficiency. We finally provide numerical illustrations for three European countries featuring different labor market behaviors. We show that a double dividend may be obtained without worsening the initial inequalities if the green tax revenues are redistributed with a progressivity index lower for France than for Germany and UK. 
Keywords:  Welfare analysis,Tax progressivity,Environmental tax reform,Heterogeneity,Unemployment 
Date:  2017–06 
URL:  http://d.repec.org/n?u=RePEc:hal:wpaper:halshs01550000&r=upt 
By:  Harun Onder (The World Bank  The World Bank  The World Bank); Pierre Pestieau (CORE  Center of Operation Research and Econometrics [Louvain]  UCL  Université Catholique de Louvain, PSE  Paris School of Economics, PJSE  Paris Jourdan Sciences Economiques  UP1  Université PanthéonSorbonne  ENS Paris  École normale supérieure  Paris  INRA  Institut National de la Recherche Agronomique  EHESS  École des hautes études en sciences sociales  ENPC  École des Ponts ParisTech  CNRS  Centre National de la Recherche Scientifique); Grégory Ponthière (ERUDITE  Equipe de Recherche sur l’Utilisation des Données Individuelles en lien avec la Théorie Economique  UPEM  Université ParisEst MarnelaVallée  UPEC UP12  Université ParisEst Créteil ValdeMarne  Paris 12, PSE  Paris School of Economics, PJSE  Paris Jourdan Sciences Economiques  UP1  Université PanthéonSorbonne  ENS Paris  École normale supérieure  Paris  INRA  Institut National de la Recherche Agronomique  EHESS  École des hautes études en sciences sociales  ENPC  École des Ponts ParisTech  CNRS  Centre National de la Recherche Scientifique) 
Abstract:  This paper uses an equivalent income approach to quantify the domestic welfare loss due to the Syrian Civil War. Focusing on the (income, life expectancy) space, we show that the equivalent income has fallen by about 60 % in comparison to the preconflict level. We also find that the differential between the equivalent income and the standard income for 2016 lies between $75 and $144. Although this low willingness to pay for coming back to preconflict survival conditions can be explained by extreme poverty due to the War, the small gap between standard and equivalent incomes tends to question the extra value brought by the latter for the measurement of standards of living in situations of severe poverty. We examine some solutions to that puzzle, including a more general specification of the utility function, the shift from an ex ante approach (valuing changes in life expectancy) to an ex post approach (valuing changes in distributions of realized longevities), as well as considering population ethical aspects. None of those solutions is fully successful in solving the puzzle. 
Keywords:  Syrian War,conict,mortality,welfare,equivalent income,measurement 
Date:  2017–09 
URL:  http://d.repec.org/n?u=RePEc:hal:wpaper:hal01581896&r=upt 
By:  Xiangge Luo; Alexander Schied 
Abstract:  We consider a market impact game for $n$ riskaverse agents that are competing in a market model with linear transient price impact and additional transaction costs. For both finite and infinite time horizons, the agents aim to minimize a meanvariance functional of their costs or to maximize the expected exponential utility of their revenues. We give explicit representations for corresponding Nash equilibria and prove uniqueness in the case of meanvariance optimization. A qualitative analysis of these Nash equilibria is conducted by means of numerical analysis. 
Date:  2018–07 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1807.03813&r=upt 
By:  Lioudmila Vostrikova (LAREMA); Yuchao Dong 
Abstract:  This article is devoted to the maximisation of HARA utilities of L{\'e}vy switching process on finite time interval via dual method. We give the description of all fdivergence minimal martingale measures in initially enlarged filtration, the expression of their RadonNikodym densities involving Hellinger and KulbackLeibler processes, the expressions of the optimal strategies in progressively enlarged filtration for the maximisation of HARA utilities as well as the values of the corresponding maximal expected utilities. The example of Brownian switching model is presented to give the financial interpretation of the results. 
Date:  2018–07 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1807.08982&r=upt 
By:  Liebenehm, Sabine; Degener, Nele; Strobl, Eric 
Abstract:  Empirical studies advocating the temporal variability of risk attitudes suggest that adverse covariate shocks significantly alter risk attitudes over time, but there is no consensus on the direction. In this paper, we investigate whether risk aversion increases or decreases in response to shocks. To do so, we combine individuallevel panel data with historical rainfall data for rural Thailand and Vietnam. Our econometric analysis shows that temporal variability in risk attitudes is driven by rainfall shocks. Both severe shortages and excesses appear to increase individualsâ€™ risk aversion. Contrary to expectations, we find that this impact is lower for farmers than for nonfarmers. We can explain this result by the heterogeneous composition of nonfarmers and by farmersâ€™ ability to mitigate rainfall shocks. Our findings have potentially important implications especially for developing countries in that adverse shocks can increase poor peopleâ€™s risk aversion and may lead to decisions that perpetuate their lives in poverty. 
Keywords:  Rainfall, Risk attitudes, Risk mitigation 
JEL:  C23 D9 Q54 
Date:  2018–04 
URL:  http://d.repec.org/n?u=RePEc:tvs:wpaper:wp006&r=upt 
By:  Bradley Larsen; Anthony Lee Zhang 
Abstract:  This paper presents a twostep identification argument for a large class of quasilinear utility trading games, imputing agents' values using revealed preference based on their choices from a convex menu of expected outcomes available in equilibrium. This generalizes many existing twostep approaches in the auctions literature and applies to many cases for which there are no existing tools and where the econometrician may not know the precise rules of the game, such as incompleteinformation bargaining settings. We also derive a methodology for settings in which agents' actions are not perfectly observed, bounding menus and agents' utilities based on features of the data that shift agents' imperfectly observed actions. We propose nonparametric value estimation procedures based on our identification results for general trading games. Our procedures can be combined with previously existing tools for handling unobserved heterogeneity and nonindependent types. We apply our results to analyze efficiency and surplus division in the complex game played at wholesale usedcar auctions, that of a secret reserve price auction followed by sequential bargaining between the seller and high bidder. 
JEL:  C1 C7 D4 D8 L0 
Date:  2018–07 
URL:  http://d.repec.org/n?u=RePEc:nbr:nberwo:24837&r=upt 
By:  Song, Dongho (Boston College); Tang, Jenny (Federal Reserve Bank of Boston) 
Abstract:  We embed a news shock, a noisy indicator of the future state, in a twostate Markovswitching growth model. Our framework, combined with parameter learning, features rich historydependent uncertainty dynamics. We show that bad news that arrives during a prolonged economic boom can trigger a “Minsky moment”—a sudden collapse in asset values. The effect is greatly amplified when agents have a preference for early resolution of uncertainty. We leverage survey recession probability forecasts to solve a sequential learning problem and estimate the full posterior distribution of model primitives. We identify historical periods in which uncertainty and risk premia were elevated because of news shocks. 
Keywords:  Bayesian learning; discrete environment; Minsky moment; news shocks; recursive utility; risk premium; survey forecasts; uncertainty 
JEL:  C11 E32 E37 G12 
Date:  2018–01–01 
URL:  http://d.repec.org/n?u=RePEc:fip:fedbwp:183&r=upt 
By:  Ying Hu; Gechun Liang; Shanjian Tang 
Abstract:  We introduce and solve a new type of quadratic backward stochastic differential equation systems defined in an infinite time horizon. Such systems arise naturally as candidate solutions to characterize forward performance processes and their associated optimal trading strategies in a regime switching market. We also study the asymptotic limit of the infinite horizon BSDE system, which gives arise to a novel ergodic BSDE system. In addition, we develop a connection between the solution of the ergodic BSDE system and the longterm growth rate of classical utility maximization problems. 
Date:  2018–07 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1807.01816&r=upt 
By:  Marco Piccirilli; Tiziano Vargiolu 
Abstract:  We study an optimal portfolio problem designed for an agent operating in intraday electricity markets. The investor is allowed to trade in a single risky asset modelling the continuously traded power and aims to maximize the expected terminal utility of his wealth. We assume a meanreverting additive process to drive the power prices. In the case of logarithmic utility, we reduce the fully nonlinear HamiltonJacobiBellman equation to a linear parabolic integrodifferential equation, for which we explicitly exhibit a classical solution in two cases of modelling interest. The optimal strategy is given implicitly as the solution of an integral equation, which is possible to solve numerically as well as to describe analytically. An analysis of two different approximations for the optimal policy is provided. Finally, we perform a numerical test by adapting the parameters of a popular electricity spot price model. 
Date:  2018–07 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1807.01979&r=upt 
By:  Stelios Arvanitis (Athens University of Economics and Business); O. Scaillet (University of Geneva and Swiss Finance Institute); Nikolas Topaloglou (Athens University of Economics and Business) 
Abstract:  Using properties of the cdf of a random variable defined as a saddletype point of a real valued continuous stochastic process, we derive firstorder asymptotic properties of tests for stochastic spanning w.r.t. a stochastic dominance relation. First, we define the concept of Markowitz stochastic dominance spanning, and develop an analytical representation of the spanning property. Second, we construct a nonparametric test for spanning via the use of an empirical analogy. The method determines whether introducing new securities or relaxing investment constraints improves the investment opportunity set of investors driven by Markowitz stochastic dominance. In an application to standard data sets of historical stock market returns, we reject market portfolio Markowitz efficiency as well as twofund separation. Hence there exists evidence that equity management through base assets can outperform the market, for investors with Markowitz type preferences. 
Keywords:  SaddleType Point, Markowitz Stochastic Dominance, Spanning Test, Linear and Mixed integer programming, reverse Sshaped utility 
JEL:  C12 C14 C44 C58 D81 G11 
Date:  2018–02 
URL:  http://d.repec.org/n?u=RePEc:chf:rpseri:rp1808&r=upt 
By:  Carrillo, Paul; Emran, M. Shahe 
Abstract:  We analyze firm's tax choices facing a withholding and enforcement regime with a focus on three salient mechanisms of bunching: (i) transaction costs, (ii) withholding threshold as a reference point for taxpayer that creates a kink due to loss aversion, and (iii) withholding threshold as a reference point for audit (audit trigger model). The transaction costs model predicts that none of the firms that bunch at the withholding threshold would declare higher taxes when withholding rate is increased, as was the case in Ecuador in 2007. Evidence from a tripledifference research design shows the opposite. A prospect theoretic model with the power value function of Kahneman and Tversky (1979) does not generate bunching at the withholding threshold. While linear prospect theory (LPT) can generate bunching under certain conditions, it also yields testable predictions that are not consistent with the behavior of a significant proportion of firms. Under the LPT, given an enforcement and withholding regime, if a firm bunches in one year it should also bunch in all the following years, or if it unbunches in a following year, it should declare taxes less than the withheld amount. The evidence from panel data on the universe of all corporations in Ecuador shows very low persistence in bunching: conditional on bunching at least once, only 34 percent firms bunch every year before changes in the withholding rate, and among the firms that unbunch 3540 percent declare taxes more than the withheld amount, thus contradicting the LPT model for a substantial proportion of the firms. Using the Sasabuchi t test as developed by Lind and Mehlum (2010), we find that the relation between probability of bunching and assets of a firm is invertedU which is consistent with the audit trigger model. The evidence suggests that the behavior of the firms cannot be captured by a single model. The strength of enforcement is important in determining bunching in an LPT model which suggests crosscountry differences in the role played by loss aversion in bunching of taxpayers at policy thresholds. 
Keywords:  Loss Aversion, Reference Dependence, Transaction Costs, Audit Trigger, Bunching, Withholding, Firms, Profit Tax, Tax Evasion, Ecuador 
JEL:  H2 H25 H26 O1 
Date:  2018–06–16 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:87445&r=upt 