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on Utility Models and Prospect Theory |
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Issue of 2018‒12‒03
24 papers chosen by |
| By: | Martín Leites (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía); Xavier Ramos (Universitat Autónoma de Barcelona) |
| Abstract: | Income comparisons are important for individual well-being. We examine the shape of the relationship between relative income and life satisfaction, and test empirically if the features of the value function of prospect theory carry on to experienced utility. We draw on a unique dataset for a middle-income country, that allows us to work with an endogenous reference income, which differs for individuals with the same observable characteristics, depending on the perception error about their relative position in the distribution. We find the value function for experienced utility to be concave for both positive and, at odds with prospect theory, also negative relative income. Loss aversion is only satisfied for incomes that are sufficiently distant from the reference income. Our heterogeneity analysis shows that the slope of the value function differs across individuals who care differently about income comparisons, people with different personality traits, or social beliefs. |
| Keywords: | Life satisfaction, relative income, loss aversion, prospect theory |
| JEL: | D6 I31 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:ulr:wpaper:dt-18-17&r=upt |
| By: | Fausto Corradin (GRETA Associati, Venice); Domenico Sartore (Department of Economics, University Of Venice Cà Foscari) |
| Abstract: | The condition of Risk Aversion implies that the Utility Function must be concave. We take into account the dependence of the Utility Function on the return that has any type of two-parameter distribution; it is possible to define Risk and Target, the former may be the Standard Deviation of the return, and the latter is usually the Expected value of the return, as a generic function of these two parameters. Considering the 3D space of Risk, Target and Expected Utility, this paper determines the Differential Conditions for these three functions so that the Expected Utility Function depends decreasingly on Risk and increasingly on Target, that means the iso-utility curves have positive slope in the plane of Risk and Target. As a specific case, we discuss these conditions in the case of the CRRA Utility Function and the Truncated Normal distribution. Furthermore, different measures of Risk are chosen, such as Value at Risk (VaR) and Expected Shortfall (ES), to verify if these measures maintain a positive slope of the iso-utility curves in the Risk-Target plane. |
| Keywords: | Concavity, CRRA, Differential Condition, Expected Shortfall, Expected Utility Function, Quadratic Utility Function, Risk Aversion, Standard Deviation, Transformation of Parametric Functions, Truncated Normal distribution, Value at Risk |
| JEL: | G11 G14 G23 G24 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2018:24&r=upt |
| By: | David S. Ahn (University of California, Berkeley); Ryota Iijima (Cowles Foundation, Yale University); Yves Le Yaouanq (Ludwig-Maximilians-Universitat); Todd Sarver (Duke University) |
| Abstract: | We propose nonparametric de?nitions of absolute and comparative naivete. These de?nitions leverage ex-ante choice of menu to identify predictions of future behavior and ex-post (random) choices from menus to identify actual behavior. The main advantage of our de?nitions is their independence from any assumed functional form for the utility function representing behavior. An individual is sophisticated if she is indi?erent ex-ante between retaining the option to choose from a menu ex-post or committing to her actual distribution of choices from that menu. She is naive if she prefers the flexibility in the menu, reflecting a mistaken belief that she will act more virtuously than she actually will. We propose two de?nitions of comparative naivete and explore the restrictions implied by our de?nitions for several prominent models of time inconsistency. |
| Keywords: | Naive, Sophisticated, Time inconsistent, Comparative statics |
| JEL: | D90 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2074r&r=upt |
| By: | Channa, H.; Ricker-Gilbert, J.; De Groote, H.; Marenya, P.; Bauchet, J. |
| Abstract: | This paper describes an experimental auction conducted among maize traders and farmers in Western Kenya to measure adoption for two low-cost technologies that can measure grain moisture content. Willingness-to-pay auctions (WTP) were combined with a risk preference lottery, allowing an opportunity to study the impact of risk preferences on technology adoption. The specifics of this technology also allows us to identify the impact of risk aversion on willingness to pay for a technology when production uncertainty is not part of the equation. We also randomized two variations of the BDM method for collecting WTP data allowing for a mechanism by which to study the impact of the method on valuation data. We find some evidence that risk aversion increased willingness to pay. Another result with implications in implementation of field experiments in the developing world is that farmers were sensitive to the method in which the auction was presented but traders were not. Acknowledgement : |
| Keywords: | Risk and Uncertainty |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iaae18:277406&r=upt |
| By: | Christophe Courbage (Geneva School of Business Administration (HES-SO), Switzerland); Guillem Montoliu-Montes (University of Lausanne, Department of Actuarial Science, Switzerland); Béatrice Rey (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France) |
| Abstract: | This paper empirically assesses how financial risk aversion reacts to a change in individuals’ wealth and health and to the presence of both financial and health risks using the Survey of Health, Ageing, and Retirement in Europe (SHARE). Individuals in our sample exhibit financial risk aversion decreasing both in wealth and health. Financial risk aversion is also found to increase in the presence of a background financial risk and a background health risk. Interestingly, risk aversion is shown to be convex in wealth but linear in health. Such findings complement the literature on risk aversion behaviours and can help to better understand various economic decisions in a risky environment. |
| Keywords: | risk aversion, (cross-) DARA, (cross-) risk vulnerability, background risk, health risk |
| JEL: | D01 D81 I12 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1827&r=upt |
| By: | Jan (J.P.M.) Heufer (Erasmus University Rotterdam, Erasmus School of Economics); Jason Shachat (Durham University Business School, Wuhan University); Yan Xu (Erasmus University Rotterdam, Erasmus School of Economics) |
| Abstract: | We propose an instrument to measure individuals' social preferences regarding equity and efficiency behind a veil of ignorance. We pair portfolio and wealth distribution choice problems which have a common budget set. For a given bundle, the distribution over an individual's wealth is the same for both problems. The portfolio choice serves as a benchmark to evaluate whether the wealth distribution choice exhibits equity or efficiency preferring tastes. We report experiments using a within-subject design testing the veracity of this instrument. We find clusters of equity preferring, efficiency preferring, and socially agnostic individuals through reduced form, revealed preference, and structural estimation analyses. |
| Keywords: | Inequity aversion; revealed preference; risk preferences; social preferences; veil of ignorance |
| JEL: | C14 C91 D11 D12 D63 |
| Date: | 2018–11–16 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20180087&r=upt |
| By: | Hagenhoff, Tim |
| Abstract: | In this paper, I propose an optimal interest rate rule under heterogeneous expectations derived from a welfare criterion that is a second-order approximation of heterogeneous household utility following Di Bartolomeo et al. (2016). Additionally, I explore the agent level of the Branch and McGough (2009) framework in a more detailed fashion which is important as the central bank's welfare criterion depends on consumption inequality. I find that the consumption decision of "rational" agents in Di Bartolomeo et al. (2016) is inconsistent with the higher-order beliefs assumption of Branch and McGough (2009). Hence, consumption rules are derived that are consistent with the micro-foundations of Branch and McGough (2009) including a possible specification of agent's long-run beliefs. Further, the welfare analysis shows that the optimal interest rate rule yields welfare gains that range between 0.1 and 7.1 percent under the considered parameter values relative to a rule that is optimized under a conventional inflation-targeting objective as in Gasteiger (2014). Welfare gains are high when the underlying economy features a high degree of heterogeneity. |
| Keywords: | optimal monetary policy,policy implementation,heterogeneous expectations,inequality |
| JEL: | E52 D84 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bamber:139&r=upt |
| By: | Patil, V.; Veettil, P.C. |
| Abstract: | Covariate production risks are some of the central features of the agriculture sector especially in developing countries that merit further economic research. Risk attitudes of the farmers play a crucial role in designing and targeting mechanisms to mitigate risks. As a part of our larger research project towards developing a comprehensive crop insurance product, we conduct risk preferences elicitation experiment with rice-growing farmers in eastern India. The experiment is relatively unique in that it introduces a minimum entry fee which help in eliciting risk preferences that are close to their behaviour in real decision makings. Using zero-inflated ordered probit mode, we analysed the experimental data. The results show that small and marginal farmers tend to opt for options associated with high risk aversion. As majority of the farmers in the sampled states have small and marginal landholdings, in general farmers tend to be risk averse. In addition, compared to young farmers, elder farmers are found to be more risk averse. Education and household size of respondents have also positive effect on riskier options and negative effect on risk averse options. Farmers who belong to minority caste/social class (SC and ST) are more likely to opt the risk aversion strategy. Acknowledgement : |
| Keywords: | Risk and Uncertainty |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iaae18:277331&r=upt |
| By: | Benoit Dicharry; Phu Nguyen-Van; Thi Kim Cuong Pham |
| Abstract: | This paper aims to determine an optimal allocation of the European Cohesion Fund (ECF) and compares it with the observed allocation. This optimal allocation is the solution of a donor optimization problem which maximizes recipient countries' GDP per capita to achieve economic convergence in the EU. Compared to the observed allocation, our solution can identifiy the recipient countries that can benefit from higher ECF transfers than the observed levels, as those having low relative GDP per capita, large population size and where the ECF has a strong capacity to support economic growth. Result is robust to changes in the specification of the donor's utility function. |
| Keywords: | Economic growth; European cohesion policy; Foreign aid. |
| JEL: | F35 I30 O47 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2018-46&r=upt |
| By: | Thomas Garcia (Univ Lyon, Université Lumière Lyon 2, GATE L-SE UMR 5824, F-69130 Ecully, France; QuBE - School of Economics and Finance, QUT, Brisbane, Australia); Sébastien Massoni (QuBE - School of Economics, Finance and Australian Centre for Entrepreneurship Research, QUT, Brisbane, Australia); Marie Claire Villeval (Univ Lyon, CNRS, GATE L-SE UMR 5824, F-69131 Ecully, France ; IZA, Bonn, Germany) |
| Abstract: | A donation may have ambiguous costs or ambiguous benefits. In a laboratory experiment, we show that individuals use this ambiguity strategically as a moral wiggle room to behave less generously without feeling guilty. Such excuse-driven behavior is more pronounced when the costs of a donation -rather than its benefits- are ambiguous. However, the importance of excuse-driven behavior is comparable under ambiguity and under risk. Individuals exploit any type of uncertainty as an excuse not to give, regardless of the nature of this uncertainty. |
| Keywords: | Ambiguity, excuse-driven behavior, charitable giving, social preferences, experiment |
| JEL: | C91 D64 D81 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1826&r=upt |
| By: | Cettolin, Elena (Tilburg University, Center For Economic Research); Dalton, Patricio (Tilburg University, Center For Economic Research); Kop, Willem (Tilburg University, Center For Economic Research); Zhang, Wanqing (Tilburg University, Center For Economic Research) |
| Abstract: | Rationality is a fundamental pillar of Economics. It is however unclear if this assumption holds when decisions are made under stress. To answer this question, we design a laboratory experiment where we exogenously induce physiological stress in participants and test the consistency of their choices with economic rationality. We induce stress with the Cold Pressor test and measure it by assessing individuals’ cortisol levels in saliva. Economic rationality is measured by the consistency of participants’ choices with the Generalized Axiom of Revealed Preference (GARP). We find that participants exposed to the stress manipulation experience a significant increase in cortisol levels compared to those in the placebo group. However, differences in cortisol levels do not affect the consistency of choices with GARP. Our findings provide strong empirical support for the robustness of the economic rationality assumption. |
| Keywords: | economic rationality; GARP; Physiological Stress; Cortisol |
| JEL: | C90 C91 D01 D91 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiucen:53ddb666-a610-4835-b6ba-6985b5fd2761&r=upt |
| By: | Cabrales, Antonio; Gossner, Olivier; Serrano, Roberto |
| Abstract: | Consider agents who are heterogeneous in their preferences and wealth levels. These agents may acquire information prior to choosing an investment that has a property of no-arbitrage, and each piece of information bears a corresponding cost. We associate a numeric index to each information purchase (information-cost pair). This index describes the normalized value of the information purchase: it is the risk-aversion level of the unique CARA agent who is indifferent between accepting and rejecting the purchase, and it is characterized by a \duality" principle that states that agents with a stronger preference for information should engage more often in information purchases. No agent more risk-averse than the index finds it profitable to acquire the information, whereas all agents less risk-averse than the index do. Given an empirically measured range of degrees of risk aversion in a competitive economy with no-arbitrage investments, our model therefore comes close to describ-ing an inverse demand for information, by predicting what pieces of information are acquired by agents and which ones are not. Among several desirable properties, the normalized-value formula induces a complete ranking of information structures that extends Blackwell's classic ordering. |
| Keywords: | informativeness; information purchases; free energy; Kullback-Leibler divergence; relative entropy; decision under uncertainty; no-arbitrage investment; Blackwell ordering |
| JEL: | L81 |
| Date: | 2017–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:82501&r=upt |
| By: | Gonzalez, J.; Lacaze, V. |
| Abstract: | This paper evaluates the effect on market shares and consumer surplus of the introduction of a Good Agricultural Practices (GAP)-labeled product in the frozen fried potatoes (FFP) industry. We first estimate a model of household demand in Mar del Plata, Argentina, using scanner data and demographic information. We find that higher income individuals are more concerned about health and nutrition, and that younger and lower-income consumers are more price-sensitive. Then we postulate that a properly GAP-labeled FFP is available in the market, and we assess its effect by using the estimated utility function and prior information about consumers declared willingness to pay (WTP) for sustainably produced potatoes. We find that the older the individual, the greater the influence of the hypothetical introduction of the GAP-labeled product; the relationship is less conclusive in the case of income. Finally, we predict the results of a greater consumer surplus extraction by fixing a higher price for the new product, and we calculate the maximum increase in the marginal cost that the firm would be able to afford if farmers charge higher prices for GAP fresh potatoes Acknowledgement : |
| Keywords: | Agribusiness |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iaae18:277559&r=upt |
| By: | Civelli, Andrea (University of Arkansas); Deck, Cary (University of Alabama and Chapman University); LeBlanc, Justin D. (University of Arkansas); Tutino, Antonella (Federal Reserve Bank of Dallas) |
| Abstract: | This paper presents a laboratory experiment that directly tests the theoretical predictions of consumption choices under rational inattention. Subjects are asked to select consumption when income is random. They can optimally decide to reduce uncertainty about income by acquiring signals about it. The informativeness of the signals directly relates to the cognitive effort required to process the information. We find that subjects’ behavior is largely in line with the predictions of the theory: 1) Subjects optimally make stochastic consumption choices; 2) They respond to incentives and changes in the economic environment by varying their attention and consumption; 3) They respond asymmetrically to positive and negative shocks to income, with negative shocks triggering stronger and faster reactions than positive shocks. |
| Keywords: | Rational Inattention; Experimental Evidence; Information Processing Capacity; Consumption |
| JEL: | C91 D11 D8 E20 |
| Date: | 2018–11–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:1813&r=upt |
| By: | Lloyd-Smith, P.; Adamowicz, V. |
| Abstract: | Willingness-to-accept (WTA) questions have been largely abandoned in stated preference empirical work in favor of eliciting willingness-to-pay (WTP) responses, mainly due to perceived unreliability of questions that ask respondents for compensation amounts. This paper reassesses whether stated WTA welfare measures can be valid in public and private good contexts. We conduct two sets of laboratory experiments to analyze whether elicitation format, survey design and framing, and follow-up questions can generate truthful responses. For public goods, we adapt the existing WTP incentive compatibility theoretical framework to the WTA context and test the theory using an experiment involving voting. Results are consistent with the WTP literature and suggest that WTA values can be valid as long as responses have consequences for respondents. For the private good experiment, we focus on whether respondents are motivated to affect the price or the provision of the good. We find that strategic behavior is present and in the direction expected by theory. Survey framing and the use of follow-up questions can provide bounds on the value estimates. These findings raise potential concerns with the use of non-incentive compatible elicitation mechanisms in WTA contexts. Acknowledgement : |
| Keywords: | Research Methods/ Statistical Methods |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iaae18:277241&r=upt |
| By: | Czichowsky, Christoph Johannes; Peyre, Rémi; Schachermayer, Walter; Yang, Junjian |
| Abstract: | The present paper accomplishes a major step towards a reconciliation of two conflicting approaches in mathematical finance: on the one hand, the mainstream approach based on the notion of no arbitrage (Black, Merton & Scholes); and on the other hand, the consideration of non-semimartingale price processes, the archetype of which being fractional Brownian motion (Mandelbrot). Imposing (arbitrarily small) proportional transaction costs and considering logarithmic utility optimisers, we are able to show the existence of a semimartingale, frictionless shadow price process for an exponential fractional Brownian financial market |
| Keywords: | proportional transaction costs; fractional Brownian motion; shadow prices; two-way crossing; logarithmic utility |
| JEL: | C61 G11 |
| Date: | 2018–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:85230&r=upt |
| By: | Christophe Courbage (Geneva School of Business Administration (HES-SO), Switzerland); Béatrice Rey (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France) |
| Abstract: | This paper investigates the conditions for which spreading N independent and unfair risks provides the highest level of welfare than any other possible allocations of risks. It shows that such preferences do not require a higher order property than temperance. Results are also interpreted in terms of the property of superadditivity of the utility premium. |
| Keywords: | temperance, risk spreading, superadditivity, utility premium |
| JEL: | D81 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1828&r=upt |
| By: | Abdul Haque (COMSAT Institute of Information Technology, Lahore); Adeel Nasir (University of the Punjab, Jhelum Campus) |
| Abstract: | Fama and French (1992) three factor and Fama and French (2014) five-factor Model estimated relevant idiosyncratic factors and CAPM beta as the systematic risk factor for stock returns? variations. Application of Value at Risk (VaR) and Expected Shortfall (ES) modified the risk management criteria. This study applies traditional one factor, three factor and five factor model on Pakistan?s manufacturing companies. Compares and modifies the stated models while using VaR and ES as systematic risk factor and check the robustness of the significant extent of worst expected loss provided by VaR and ES by measuring 95% and 99% confidence levels and their impact on the stock returns. In comparison with traditional market risk factor, our findings are in favor of VaR and ES factor as it significantly affects the cross-sectional of excess stock returns and fulfills the criteria of risk aversion. |
| Keywords: | Value at Risk, Expected Shortfall, Fama and French Three Factor Model, Five Factor Model, Systematic Risk, Idiosyncratic Risk |
| JEL: | G10 G11 G14 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iefpro:7108551&r=upt |
| By: | Klaus Adam; Dmitry Matveev; Stefan Nagel |
| Abstract: | Motivated by the observation that survey expectations of stock returns are inconsistent with rational return expectations under real-world probabilities, we investigate whether alternative expectations hypotheses entertained in the asset pricing literature are consistent with the survey evidence. We empirically test (1) the notion that survey forecasts constitute rational but risk-neutral forecasts of future returns, and (2) the notion that survey forecasts are ambiguity averse/robust forecasts of future returns. We find that these alternative hypotheses are also strongly rejected by the data, albeit for different reasons. Hypothesis (1) is rejected because survey return forecasts are not in line with risk-free interest rates and because survey expected excess returns are predictable. Hypothesis (2) is rejected because agents are not always pessimistic about future returns, instead often display overly optimistic return expectations. We speculate as to what kind of expectations theories might be consistent with the available survey evidence. |
| Keywords: | survey expectations, expected stock returns |
| JEL: | G12 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7285&r=upt |
| By: | Pejsachowicz, Leonardo; Toussaert, Séverine |
| Abstract: | In a standard model of menu choice, we examine the behavior of an agent who applies the following Cautious Deferral rule: “Whenever in doubt, don't commit; just leave options open.” Our primitive is a complete preference relation ≽ that represents the agent's choice behavior. The agent's indecisiveness is captured by means of a possibly incomplete (but otherwise rational) preference relation ≽ˆ. We ask when ≽ can be viewed as a Cautious Deferral completion of some incomplete ≽ˆ. Under the independence and continuity assumptions commonly used in the menu choice literature, we find that even the smallest amount of indecisiveness is enough to force ≽, through the above deferral rule, to exhibit preference for flexibility on its entire domain. Thus we highlight a fundamental tension between non-monotonic preferences, such as preferences for self-control, and tendency to defer choice due to indecisiveness. |
| Keywords: | Incomplete preferences Preference for flexibility Choice deferral |
| JEL: | J1 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:83566&r=upt |
| By: | Lim, S. |
| Abstract: | Does cultivating one crop secure more food than cultivating five crops for smallholder farmers in developing countries? How does farmers risk aversion affect crop diversification and food security choices at the household level? The effect of risk preference on crop diversification has been widely studied. It is unclear, however, how risk aversion, crop diversity, and food security are linked in a causal chain. This article investigates (i) the effect of crop diversification on food security and (ii) the direct effect of risk aversion on food security without a bias from crop diversification. Using the causal chain empirical strategy (Acharya et al., 2016), I estimate the direct effect of risk aversion. In using our unique experimental data collected in rural Ethiopia, our result shows the new evidence: (i) a negative effect of crop diversification on household food security and (ii) a positive direct effect of household head risk aversion on household food security. The contribution of this article consists of two parts. First, it develops the first theoretical framework to show the causal chains of risk aversion, crop diversity, and food security by adapting Sandmo s (1971) model. Second, this article provides the original evidence that crop diversity decreases food security. Acknowledgement : I am very grateful to Marc Bellemare and Terry Hurley for their comments and suggestions on earlier versions of the manuscript. |
| Keywords: | Crop Production/Industries |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iaae18:277336&r=upt |
| By: | Joanna Douat (ESPM); Mateus Ponchio (ESPM) |
| Abstract: | Prior research on anchoring indicates that arbitrary values can influence human judgment and decision-making. However, the findings differ regarding the magnitude of this effect, implying that in some circumstances the anchoring phenomena may not occur at all. The present research suggests that this behavior is not universal and attempts to identify how consumer self-confidence (CSC), a personal trait, and product category (hedonic vs. utilitarian) may affect consumers? susceptibility to anchoring effect on participants? willingness to pay. Although the moderation relationship could not be proved, it was statistically demonstrated that the kind of consumption (utilitarian/hedonic) accounts for 25% of the variability of consumer?s willingness-to-pay. Overall, this research contributes to the literature on Consumer Behavior, by shedding light on personal traits and product features that can shape anchoring response. |
| Keywords: | Anchoring Effects, Consumer Self-Confidence, Hedonic-utilitarian consumption, Consumer Behavior; Marketing. |
| JEL: | D12 M31 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iacpro:7310340&r=upt |
| By: | Peter Katuscak; Tomas Miklanek |
| Abstract: | Extensive experimental research on public goods games documents that many subjects are “conditional cooperators” in that they positively correlate their contributions with (their belief about) contributions of other subjects in their group. The goal of our study is to shed light on what preference and decision-making patterns drive this observed regularity. We consider four potential explanations, including reciprocity, conformity, inequality aversion, and residual factors such as confusing and anchoring, and aim to disentangle their effects. We find that, of the average conditionally cooperative behavior in the sample, about two thirds is accounted for by residual factors, a quarter by inequality aversion and a tenth by conformity, while reciprocity plays virtually no role. These findings carry important messages about how to interpret conditional cooperation as observed in the lab and ways it can be exploited for fundraising purposes. |
| Keywords: | : conditional cooperation; public goods game; reciprocity; conformity; inequality aversion; anchoring; fundraising; |
| JEL: | H41 C91 D64 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp631&r=upt |
| By: | Stark, Oded; Jakubek, Marcin; Szczygielski, Krzysztof |
| Abstract: | We study the assimilation behavior of a group of migrants who live in a city populated by native inhabitants. We conceptualize the group as a community, and the city as a social space. Assimilation increases the productivity of migrants and, consequently, their earnings. However, assimilation also brings the migrants closer in social space to the richer native inhabitants. This proximity subjects the migrants to relative deprivation. We consider a community of migrants whose members are at an equilibrium level of assimilation that was chosen as a result of the maximization of a utility function that has as its arguments income, the cost of assimilation effort, and a measure of relative deprivation. We ask how vulnerable this assimilation equilibrium is to the appearance of a “mutant” - a member of the community who is exogenously endowed with a superior capacity to assimilate. If the mutant were to act on his enhanced ability, his earnings would be higher than those of his fellow migrants, which will expose them to greater relative deprivation. We find that the stability of the pre-mutation assimilation equilibrium depends on the cohesion of the migrants’ community, expressed as an ability to effectively sanction and discourage the mutant from deviating. The equilibrium level of assimilation of a tightly knit community is stable in the sense of not being vulnerable to the appearance of a member becoming better able to assimilate. However, if the community is loose-knit, the appearance of a mutant will destabilize the pre-mutation assimilation equilibrium, and will result in a higher equilibrium level of assimilation. |
| Keywords: | Community/Rural/Urban Development, Financial Economics, Labor and Human Capital |
| Date: | 2018–11–19 |
| URL: | http://d.repec.org/n?u=RePEc:ags:ubzefd:280262&r=upt |