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on Utility Models and Prospect Theory |
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Issue of 2018‒09‒17
fifteen papers chosen by |
| By: | Guerrero-Baena, Maria Dolores; Villanueva, Anastasio J.; Gómez-Limóna, José A.; Glenk, Klaus |
| Abstract: | In irrigated agricultural systems, the main source of uncertainty to irrigators relates to water supply, as it significantly affects farm income. This paper investigates farmers’ utility changes associated with shifts in the probability density function of water supply leading to a higher water supply reliability (higher mean and lower variance in annual water allotments). A choice experiment relying on a mean-variance approach is applied to the case study of an irrigation district of the Guadalquivir River Basin (southern Spain). To our knowledge, this is the first study using parameters of these probability density functions of water supply as choice experiment attributes to value water supply reliability. Results show that there are different types of farmers according to their willingness to pay (WTP) for improvements in water supply reliability, with some willing to pay nothing (44.9%), others (28.6%) with relatively low WTP, and the remainder of farmers (26.5%) having high WTP. A range of factors influencing farmers’ preferences toward water supply reliability are revealed, with those related to risk exposure to water availability being of special importance. The results will help to design more efficient policy instruments to improve water supply reliability in semi-arid regions. |
| Keywords: | Agricultural and Food Policy, Environmental Economics and Policy |
| Date: | 2018–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:ags:eaa166:276193&r=upt |
| By: | Chichilnisky, Graciela (Dept. of Economics, International Affairs Building, Columbia University); Hammond, Peter J. (Dept. of Economics, and CAGE (Competitive Advantage in the Global Economy), University of Warwick); Stern, Nicholas (Dept. of Economics, and Grantham Research Institute on Climate Change and the Environment, LSE) |
| Abstract: | Ramsey famously pronounced that discounting “future enjoyments” would be ethically indefensible. Suppes enunciated an equity criterion implying that all individuals’ welfare should be treated equally. By contrast, Arrow (1999a, b) accepted, perhaps rather reluctantly, the logical force of Koopmans’ argument that no satisfactory preference ordering on a sufficiently unrestricted domain of infinite utility streams satisfies equal treatment. In this paper, we first derive an equitable utilitarian objective based on a version of the Vickrey–Harsanyi original position, extended to allow a variable and uncertain population with no finite bound. Following the work of Chichilnisky and others on sustainability, slightly weakening the conditions of Koopmans and co-authors allows intergenerational equity to be satisfied. In fact, assuming that the expected total number of individuals who ever live is finite, and that each individual’s utility is bounded both above and below, there is a coherent equitable objective based on expected total utility. Moreover, it implies the “extinction discounting rule” advocated by, inter alia, the Stern Review on climate change. |
| JEL: | D63 D70 D90 Q54 Q56 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:1174&r=upt |
| By: | Rick van der Ploeg; Armon Rezai |
| Abstract: | With the election of President Trump, climate deniers moved from the fringes to the centre of global policy making and need to be addresses in policy-making. An agnostic approach to policy, base don Pascal's wager, gives a key role to subjective prior porbability beliefs about whether climate deniers are right. Policy makers that assign 10% chance of climate deniers being correct set the global price on carbon to $19.1 per ton of emitted CO2 in 2020. Given that a non-denialist scientist making use of the DICE integrated assessment models sets the price at $21.1/tCO2, agnostics' reflection of remaining scientifc uncertainty leaves climatepolicy essentially unchanged. The robustness of an ambitious climate policy also follows from using the max-min or the min-max regret principle. Letting hte coefficient of relative ambiguity aversion vary from zero corresponding to expected utility analysis to infinity corresponding to the max-min principle, it is possible to show how policy makers dela with findamental climate model uncertainty when they are prepared to assign prior probabilities to differnet views of the works being correct. Allowing for a wide range of sensitivity exercised including damage uncertainty, it turns out that pricing carbon is the robust response under rising climate scepticism. |
| Keywords: | climate model uncertainty, climate scepticism, robust climate policies, max-min, min-max regret, ambiguity aversion, DICE integrated assessment model |
| JEL: | H21 Q51 Q54 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:oxcrwp:202&r=upt |
| By: | Julia Eisenberg; Paul Kr\"uhner |
| Abstract: | We consider an insurance company modelling its surplus process by a Brownian motion with drift. Our target is to maximise the expected exponential utility of discounted dividend payments, given that the dividend rates are bounded by some constant. The utility function destroys the linearity and the time homogeneity of the considered problem. The value function depends not only on the surplus, but also on time. Numerical considerations suggest that the optimal strategy, if it exists, is of a barrier type with a non-linear barrier. In the related article by granditz et al., it has been observed that standard numerical methods break down in certain parameter cases and no close form solution has been found. For these reasons, we offer a new method allowing to estimate the distance of an arbitrary smooth enough function to the value function. Applying this method, we investigate the goodness of the most obvious suboptimal strategies - payout on the maximal rate, and constant barrier strategies - by measuring the distance of its performance function to the value function. |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1809.01983&r=upt |
| By: | SCHOPOHL Simon, (CEREC, Université Saint-Louis and CORE, UCLouvain) |
| Abstract: | We analyse a Sender-Receiver game in which the Sender can choose between a costless cheap-talk message and a costly verifiable message. The Sender knows the true state of the world, while the Receiver only learns about the state through the message of the Sender. The utility of both players depends on an action the Receiver chooses. We keep the assumptions about the utility functions and about the messages to a minimum and state conditions for fully revealing equilibria. Under the assumption of "smooth" preferences and utility functions we show that a fully revealing equilibrium in which the Sender uses both her message types can only exist as long as the state space and action space are discrete. We illustrate this result for the classical example of quadratic loss utilities. In a continuous setting we show that there can only exist a fully revealing equilibrium in which the Sender uses different message types in different states if we allow for costless verification in some states of the world or if the utility function of at least one player is discontinuous. |
| Keywords: | cheap-talk, communication, costly disclosure, full revelation, Sender-Receiver game, verifiable information |
| JEL: | C72 D82 |
| Date: | 2018–04–25 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2018013&r=upt |
| By: | Chichilnisky, Graciela (Dept. of Economics, International Affairs Building, Columbia University); Hammond, Peter J (Dept. of Economics, and CAGE (Competitive Advantage in the Global Economy), University of Warwick); Stern, Nicholas (Dept. of Economics, and Grantham Research Institute on Climate Change and the Environment, LSE) |
| Abstract: | Ramsey famously pronounced that discounting “future enjoyments” would be ethically indefensible. Suppes enunciated an equity criterion implying that all individuals’ welfare should be treated equally. By contrast, Arrow (1999a, b) accepted, perhaps rather reluctantly, the logical force of Koopmans’ argument that no satisfactory preference ordering on a sufficiently unrestricted domain of infinite utility streams satisfies equal treatment. In this paper, we first derive an equitable utilitarian objective based on a version of the Vickrey–Harsanyi original position, extended to allow a variable and uncertain population with no finite bound. Following the work of Chichilnisky and others on sustainability, slightly weakening the conditions of Koopmans and co-authors allows intergenerational equity to be satisfied. In fact, assuming that the expected total number of individuals who ever live is finite, and that each individual’s utility is bounded both above and below, there is a coherent equitable objective based on expected total utility. Moreover, it implies the “extinction discounting rule” advocated by, inter alia, the Stern Review on climate change. JEL classification numbers: D63 ; D70 ; D90 ; Q54 ; Q56 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:wcreta:43&r=upt |
| By: | DEHEZ Pierre, (Université catholique de Louvain, CORE, Belgium); GINSBURGH Victor, (Université libre de Bruxelles and CORE) |
| Abstract: | Approval voting allows voters to list any number of candidates. Their scores are obtained by summing the votes cast in their favor. Fractional voting instead follows the One-person-one-vote principle by endowing voters with a single vote that they may freely distribute among candidates. In this paper, we show that fairness requires the distribution of votes to be uniform. Uniform fractional voting corresponds to Shapley ranking that was introduced to rank wines as the Shapley value of a cooperative game with transferable utility. Here we analyze the properties of these "ranking games" and provide an axiomatic foundation to Shapley ranking. We also analyze Shapley ranking as a social welfare function and compare it to approval ranking. |
| Keywords: | approval voting, Shapley value |
| JEL: | D71 C71 |
| Date: | 2018–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2018012&r=upt |
| By: | Alexander Plum (New Zealand Work Research Institute, Faculty of Business, Economics and Law, Auckland University of Technology) |
| Abstract: | Are low wages a way for the unemployed to switch to higher-paying jobs? Using data from the British Household Panel Survey (BHPS), the labour market dynamics of unemployed, low-paid, and higher-paid employed men are analysed. Moreover, the respective (un)employment duration and occupational skill level are accounted for. Results show that in general low wages significantly reduce the risk of future unemployment and increase the chances of ascending the salary ladder, especially in the case of long-term unemployment (>360 days). Furthermore, the occupational skill level has a substantial influence on the upward mobility of low-paid jobs: individuals working in the initial period in a low-paid and higher-skilled occupation have on average an 11 percentage points higher probability of entering higher pay compared to when working in a low-paid and low-skilled occupation. |
| Keywords: | unemployment dynamics, low-pay dynamics, intial conditions problem, random-effects probit models, maximum simulated likelihood |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:aut:wpaper:201808&r=upt |
| By: | Gill, Andrej; Hett, Florian; Tischer, Johannes |
| Abstract: | Improving financial conditions of individuals requires an understanding of the mechanisms through which bad financial decision-making leads to worse financial outcomes. From a theoretical point of view, a key candidate inducing mistakes in financial decision-making are so called present-biased preferences, which are one of the cornerstones of behavioral economics. According to theory, present-biased households should behave systematically different when it comes to consumption and saving decisions, as they should be more prone to spending too much and saving too little. In this policy letter we show how high frequency financial transaction data available in digitized form allows to precisely categorize individual financial-decision making to be present-biased or not. Using this categorization, we find that one out of five individuals in our sample exhibits present-bias and that this present-biased behavior is associated with a stronger use of overdrafts. As overdrafts represent a particularly expensive way of short-term borrowing, their systematic use can be interpreted as a measure of suboptimal financial-decision making. Overall, our results indicate that the combination of economic theory and Big Data is able to generate valuable insights with applications for policy makers and businesses alike. |
| Keywords: | financial decision-making,financial transaction data,present bias,time inconsistency |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewh:55&r=upt |
| By: | KLIMAVICIUTE Justina, (Université de Liège); PESTIEAU Pierre, (Université de Liège, CORE and Paris School of Economics); SCHOENMAECKERS Jérôme, (Université de Liège) |
| Abstract: | The aim of this paper is to analyze long-term care (LTC) insurance purchase decisions when parents expect to receive assistance from altruistic children. We first propose a simple theoretical model in which we show that the effect of children's altruism on parents' insurance decision is ambiguous and depends on a number of factors: the degree of substitutability between informal and formal care, the degree of parental altruism and the concavity of the utility functions. We then run an empirical test using data from the US, France, Spain, Germany and Israel. We find that the effect of children's altruism is negative in the US and Israel, but not significant in France, Germany and Spain, which possibly suggests that the different forces identified in the theoretical model are offsetting each other. |
| Keywords: | long-term care insurance, altruism, informal care |
| JEL: | D64 I13 J14 |
| Date: | 2018–06–11 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2018017&r=upt |
| By: | REN, Yanjun; CASTRO CAMPOS, Bente; LOY, Jens-Peter; BROSIG, Stephan |
| Abstract: | Previous literature has demonstrated that low-income people are more likely to settle for poor health choices in developed countries. By using income as a budget constraint and signal for future wellbeing in a life-course utility model, we examine the connection amongst income and overweight. The data used for this study are from the China Health and Nutrition Survey (CHNS). Estimations are conducted for overweight initiation, cessation, and participation mirroring a decision to begin and a past decision to not terminate. Our findings propose that body weight and the likelihood of overweight commencement rise with additional income but at a diminishing degree, representing a concave relation; while the likelihood of overweight discontinuance declines with additional income but at an accelerating degree, suggesting a convex relation. We presume that, as opposed to developed countries, low-income people are less inclined to be overweight in China, a country in transition. This could be explained by an income constraint for unhealthy foodstuff. Nevertheless, it will switch when income surpasses the critical threshold of the concave or inverted U-shape curve indicating that low-income people appear to receive not as much utility from future health. Specifically, this adjustment seems to occur earlier for females and inhabitants of urban areas. |
| Date: | 2018–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:ags:gewi18:275891&r=upt |
| By: | Paul Pezanis-Christou (School of Economics, University of Adelaide); Hang Wu (Harbin Institute of Technology) |
| Abstract: | We propose a novel approach to the modelling of behavior in first-price and all-pay auctions that builds on the presumption that bidders do not engage in game-theoretic reasoning. Our models, AsP (for Aspired-Payoff) and nIBE (for naïve Impulse Balance Equilibrium), exploit the information available to bidders and assume risk neutrality, no best-responding behavior and no profit-maximization. Their parameter-free variants entail either overbidding or Nash equilibrium bidding. We assess their explanatory power with the data of first-price and all-pay auction experiments and find that overall, our models outperform Nash in explaining the data on either format. Assuming probability misperception further improves their goodness-of-fit. Assuming impulse weighting in nIBE may lead to overbidding and organizes the effect of end-of-round information feedback on behavior in repeated auctions. |
| Keywords: | first-price auctions; all-pay auctions, overbidding, anticipated regret; information-feedback; Symmetric Bayes-Nash Equilibrium; Impulse Balance Equilibrium; nonlinear probability weighting; revenue equivalence; experiments |
| JEL: | C91 D03 D4 D44 D81 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:adl:wpaper:2018-12&r=upt |
| By: | Peter Bank; Yan Dolinsky |
| Abstract: | We establish a super-replication duality in a continuous-time financial model where an investor's trades adversely affect bid- and ask-prices for a risky asset and where market resilience drives the resulting spread back towards zero at an exponential rate. Similar to the literature on models with a constant spread, our dual description of super-replication prices involves the construction of suitable absolutely continuous measures with martingales close to the unaffected reference price. A novel feature in our duality is a liquidity weighted $L^2$-norm that enters as a measurement of this closeness and that accounts for strategy dependent spreads. As applications, we establish optimality of buy-and-hold strategies for the super-replication of call options and we prove a verification theorem for utility maximizing investment strategies. |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1808.09807&r=upt |
| By: | Ton S. van den Bremer; Rick van der Ploeg |
| Abstract: | Leading-order results from asymptotic analysis for the optimal price of carbon under uncertainty are derived from a macroeconomic continuous-time DSGE model with AK growth, energy use, adjustment costs, recursive utility and costs of global warming. We consider non-climatic productivity growth uncertainty, atmospheric carbon uncertainty, climate sensitivity uncertainty and climate damage uncertainty. Explicit expressions are derived that show the leading-order dependence of the optimal carbon price on these uncertainties, the various climate betas, risk aversion, intergenerational inequality aversion and convexity of the climate damage specification. Our solution allows for skewness and mean reversion in stochastic shocks to the climate sensitivity and damage coefficients. The resulting rule for the optimal risk-adjusted carbon price incorporates precautionary, risk-insurance and risk-exposure effects to deal with future economic and climatic risks. The stochastic processes are calibrated and used to estimate and interpret the impact of each source of uncertainty on the optimal risk-adjusted carbon price. |
| Keywords: | social cost of carbon, precaution, insurance, economic and climatic uncertainties, skewness, mean reversion, climate betas, risk aversion, prudence, intertemporal substitution, intergenerational inequality aversion, convex damages, DSGE |
| JEL: | H21 Q51 Q54 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:oxcrwp:203&r=upt |
| By: | Bobkova, Nina |
| Abstract: | I solve a first-price auction for two bidders with asymmetric budget distributions and known valuations for one object. I show that in any equilibrium, the expected utilities and bid distributions of both bidders are unique. If budgets are sufficiently low, the bidders will bid their entire budget in any equilibrium. For sufficiently high budgets, mass points in the equilibrium strategies arise. A less restrictive budget distribution could make both bidders strictly worse off. If the budget distribution of a bidder is dominated by the budget distribution of his opponent in the reverse-hazard rate order, the weaker bidder will bid more aggressively than his stronger opponent. In contrast to existing results for symmetric budget distributions, with asymmetric budget distributions, a second-price auction can yield a strictly higher revenue than a first-price auction. Under an additional assumption, I derive the unique equilibrium utilities and bid distributions of both bidders in an all-pay auction. |
| Keywords: | Budget Constraints; First Price Auctions; Asymmetric Bidders |
| JEL: | C72 D44 D82 |
| Date: | 2017–02–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:88628&r=upt |