|
on Utility Models and Prospect Theory |
|
Issue of 2019‒02‒11
twenty-two papers chosen by |
| By: | Irina Georgescu; Jani Kinnunen |
| Abstract: | A classical portfolio theory deals with finding the optimal proportion in which an agent invests a wealth in a risk-free asset and a probabilistic risky asset. Formulating and solving the problem depend on how the risk is represented and how, combined with the utility function defines a notion of expected utility. In this paper the risk is a fuzzy variable and the notion of expected utility is defined in the setting of Liu's credibility theory. Thus the portfolio choice problem is formulated as an optimization problem in which the objective function is a credibilistic expected utility. Different approximation calculation formulas for the optimal allocation of the credibilistic risky asset are proved. These formulas contain two types of parameters: various credibilistic moments associated with fuzzy variables (expected value, variance, skewness and kurtosis) and the risk aversion, prudence and temperance indicators of the utility function. |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1901.08986&r=all |
| By: | Jos\'e Cl\'audio do Nascimento |
| Abstract: | There are moments where we make decisions involving tradeoffs among costs and benefits occurring in different times. Essentially, in these cases, we are evaluating dynamic processes with outcomes still unknown. So, do we use some intuitive logic to judge changes involving values and time? The fuzzy temporal logic, introduced in this paper, proposes to model the figures of thought necessary to form a rhetoric for decision-making. To exemplify, the intertemporal choices and the lotteries choices are analyzed. The first problem is related to the time preference of receiving amounts on different dates. So it is shown that a subadditive hyperbolic discount function is not anomaly, but it consistently describes the goods delay within the fuzzy temporal logic. The second problem is related to values and probabilities of lotteries, where Prospect Theory behaviors and the S-shaped curve can be described using tense operators and fuzzy set operators. In addition, it is shown that some behaviors are amount dependent where the fuzziness can be decisive in the judgment. Thus, time, uncertainty and fuzziness are unified in a single matter which models the rhetoric for decision-making in different contexts of gains and losses. |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1901.01970&r=all |
| By: | Rolls, Edmund T. |
| Abstract: | Two systems in the brain that are involved in emotional and economic decision-making are described. The first is an evolutionarily old emotion-based system that operates on rewards defined by the genes such as food, warmth, social reputation, and having children. Such decisions are often based on heuristics, such as being highly sensitive to losses, because a single loss might influence one's reproductive success. This is a multidimensional system with many rewards and punishers, all of which cannot be simultaneously optimized. The second route to decision-making involves reasoning, in which it is assumed that utility can be accurately assessed and logical reason can be applied, though the human brain is not naturally computationally good at logical assessment. When decisions are taken, all those factors apply, and in addition there is noise introduced into the system by the random firing times of neurons for a given mean firing rate. The implications for economic decision-making are described. In macroeconomics, it is assumed that the economy behaves like one "representative" agent who can take rational and logical decisions, and who can maximize utility over a constraint. Given the neuroscience of decision-making, the situation is more complex. The utility function may be multidimensional, the reward value along each dimension may fluctuate, the reasoning may be imperfect, and the decision-making process is subject to noise in the brain, making it somewhat random from occasion to occasion. Moreover, each individual has a different set of value functions along each dimension, with different sensitivities to different rewards and punishers, which are expressed in the different personalities of different individuals. These factors underlying the neuroscience of human decision-making need to be taken into account in building and utilizing macroeconomic theories. |
| Keywords: | decision-making,brain mechanisms,probabilistic choice,attractor network,reward value,economic value,macroeconomics,microeconomics,orbitofrontal cortex |
| JEL: | D01 D87 D91 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:20198&r=all |
| By: | Jean-Pierre Drugeon (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - 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); Bertrand Wigniolle (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - 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 article considers the long-run equilibrium distribution of an economy populated by heterogenous and present biased quasi-hyperbolic discounting agents. In a first configuration with logarithmic utility functions and Cobb-Douglas production technologies, this article establishes the existence and the uniqueness of the equilibrium: only one agent, determined by the highest value of a coefficient building from both the degree of present bias and the rate of discount, will have a positive long-run consumption and a positive long-run wealth. A second configuration with constant elasticities of substitution utilities and linear production technologies is then considered. This article similarly establishes the existence and the uniqueness of the equilibrium. There is generically a unique agent with the highest growth rate for his consumption and his wealth. This agent is determined by both preferences and technology parameters and may change following a technological shock. |
| Keywords: | Heterogeneities,quasi-hyperbolic discounting,linear decision rules |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01962004&r=all |
| By: | Paul Levine (University of Surrey and CIMS) |
| Abstract: | This survey and assessment of the state of DSGE modelling is structured around six key criticisms levelled at the approach. The first is fundamental and common to macroeconomics and microeconomics alike - namely, problems with rationality and expected utility maximization. The second is that DSGE models examine fluctuations about an exogenous balanced growth path and there is no role for endogenous growth, either medium or long-term. The third consists of a number of concerns associated with systems estimation. The fourth is another fundamental problem with any microfounded macro-model - that of heterogeneity and aggregation. The fifth and sixth concerns focus on the rudimentary nature of earlier models that lacked unemployment and a banking sector. |
| JEL: | C11 C18 C32 E32 E47 E52 E62 O44 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0319&r=all |
| By: | Miao, Jianjun (Boston University); Wei, Bin (Federal Reserve Bank of Atlanta); Zhou, Hao (Tsinghua University) |
| Abstract: | This paper offers an ambiguity-based interpretation of variance premium—the difference between risk-neutral and objective expectations of market return variance—as a compounding effect of both belief distortion and variance differential regarding the uncertain economic regimes. Our approach endogenously generates variance premium without imposing exogenous stochastic volatility or jumps in consumption process. Such a framework can reasonably match the mean variance premium as well as the mean equity premium, equity volatility, and the mean risk-free rate in the data. We find that about 96 percent of the mean variance premium can be attributed to ambiguity aversion. Applying the model to historical consumption data, we find that variance premium mostly captures depressions, deep recessions, and financial panics, with a postwar peak in 2009. |
| Keywords: | ambiguity aversion; learning; variance premium; regime shift; belief distortion |
| JEL: | D81 E44 G12 G13 |
| Date: | 2018–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2018-14&r=all |
| By: | Torben G. Andersen (Northwestern University and CREATES); Nicola Fusari (The Johns Hopkins University Carey Business School); Viktor Todorov (Northwestern University) |
| Abstract: | We study the dynamic relation between market risks and risk premia using time series of index option surfaces. We find that priced left tail risk cannot be spanned by market volatility (and its components) and introduce a new tail factor. This tail factor has no incremental predictive power for future volatility and jump risks, beyond current and past volatility, but is critical in predicting future market equity and variance risk premia. Our findings suggest a wide wedge between the dynamics of market risks and their compensation, with the latter typically displaying a far more persistent reaction following market crises. |
| Keywords: | Option Pricing, Risk Premia, Jumps, Stochastic Volatility, Return Predictability, Risk Aversion, Extreme Events |
| JEL: | C51 C52 G12 |
| Date: | 2018–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2018-07&r=all |
| By: | Sarah Bensalem (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon); Nicolás Hernández Santibáñez (Department of Mathematics - University of Michigan - University of Michigan [Ann Arbor]); Nabil Kazi-Tani (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon) |
| Abstract: | This paper studies an equilibrium model between an insurance buyer and an insurance seller, where both parties' risk preferences are given by convex risk measures. The interaction is modeled through a Stackelberg type game, where the insurance seller plays first by offering prices, in the form of safety loadings. Then the insurance buyer chooses his optimal proportional insurance share and his optimal prevention effort in order to minimize his risk measure. The loss distribution is given by a family of stochastically ordered probability measures, indexed by the prevention effort. We give special attention to the problems of self-insurance and self-protection. We prove that the formulated game admits a unique equilibrium, that we can explicitly solve by further specifying the agents criteria and the loss distribution. In self-insurance, we consider also an adverse selection setting, where the type of the insurance buyers is given by his loss probability, and study the screening and shutdown contracts. Finally, we provide case studies in which we explicitly apply our theoretical results. |
| Keywords: | Coherent risk measures,Stackelberg game,Prevention,Self-insurance,Self-protection |
| Date: | 2019–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01983433&r=all |
| By: | Karlson Pfannschmidt; Pritha Gupta; Eyke H\"ullermeier |
| Abstract: | We study the problem of learning choice functions, which play an important role in various domains of application, most notably in the field of economics. Formally, a choice function is a mapping from sets to sets: Given a set of choice alternatives as input, a choice function identifies a subset of most preferred elements. Learning choice functions from suitable training data comes with a number of challenges. For example, the sets provided as input and the subsets produced as output can be of any size. Moreover, since the order in which alternatives are presented is irrelevant, a choice function should be symmetric. Perhaps most importantly, choice functions are naturally context-dependent, in the sense that the preference in favor of an alternative may depend on what other options are available. We formalize the problem of learning choice functions and present two general approaches based on two representations of context-dependent utility functions. Both approaches are instantiated by means of appropriate neural network architectures, and their performance is demonstrated on suitable benchmark tasks. |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1901.10860&r=all |
| By: | Hall, Axel; Gylfi Zoega |
| Abstract: | The authors propose an explanation of why Europeans choose to work fewer hours than Americans and also suffer higher rates of unemployment. Labor market regulations, unemployment benefits, and high levels of public consumption in many European countries reduce, ceteris paribus, the gains from being employed, which makes employed workers ask for higher wages relative to productivity. The higher wages make firms offer fewer vacancies, as well as raising the level of consumption enjoyed by workers, which makes them want to enjoy more leisure because consumption and leisure are complements in the utility function. |
| Keywords: | job search,unemployment,working hours |
| JEL: | J63 J64 J65 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:20191&r=all |
| By: | Elias Bouacida (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - 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: | I introduce a general method for identifying choice correspondences experimentally, i.e., the sets of best alternatives of decision makers in each choice sets. Most of the revealed preference literature assumes that decision makers can choose sets. In contrast, most experiments force the choice of a single alternative in each choice set. In this paper, I allow decision makers to choose several alternatives, provide a small incentive for each alternative chosen, and then randomly select one for payment. I derive the conditions under which the method at least partially identifies the choice correspondence, by obtaining supersets and subsets for each choice set. I illustrate the method with an experiment, in which subjects chose between four paid tasks. I can retrieve the full choice correspondence for 26% of subjects and bind it for another 46%. Subjects chose sets of size 2 or larger 60% of the time, whereas only 3% of them always chose singletons. I then show that 46% of all observed choices can be rationalized by complete, reflexive and transitive preferences in my experiment, i.e., satisfy the Weak Axiom of Revealed Preferences – WARP hereafter. Weakening the classical model, incomplete preferences or just-noticeable difference preferences do not rationalize more choice correspondences. Going beyond WARP, however, I show that complete, reflexive and transitive preferences with menu-dependent choices rationalize 93% of observed choices. Having elicited choice correspondences allows me to conclude that indifference is widespread in the experiment. These results pave the way for exploring various behavioral models with a unified method. |
| Keywords: | choice correspondences,revealed preferences,welfare,indifference,WARP,justnoticeable preferences,aggregation of preferences |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-01998001&r=all |
| By: | Franz Dietrich (Centre d'Economie de la Sorbonne Author-Workplace-Homepage: https://centredeconomiesorbonne.univ-paris1.fr); Christian List (London School of Economics) |
| Abstract: | Agents are often assumed to have degrees of belief (“credences”) and also binary beliefs (“beliefs simpliciter”). How are these related to each other? A much-discussed answer asserts that it is rational to believe a proposition if and only if one has a high enough degree of belief in it. But this answer runs into the “lottery paradox”: the set of believed propositions may violate the key rationality conditions of consistency and deductive closure. In earlier work, we showed that this problem generalizes: there exists no local function from degrees of belief to binary beliefs that satisfies some minimal conditions of rationality and non-triviality. “Locality” means that the binary belief in each proposition depends only on the degree of belief in that proposition, not on the degrees of belief in others. One might think that the impossibility can be avoided by dropping the assumption that binary beliefs are a function of degrees of belief. We prove that, even if we drop the “functionality” restriction, there still exists no local relation between degrees of belief and binary beliefs that satisfies some minimal conditions. Thus functionality is not the source of the impossibility; its source is the condition of locality. If there is any non-trivial relation between degrees of belief and binary beliefs at all, it must be a “holistic” one. We explore several concrete forms this “holistic” relation could take. |
| Keywords: | binary beliefs (yes/no); subjective probabilities; construction of binary beliefs from subjective probabilities; impossibility theorem |
| JEL: | D81 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:19001&r=all |
| By: | Diego Zabaljauregui; Luciano Campi |
| Abstract: | Starting from the Avellaneda--Stoikov framework, we consider a market maker who wants to optimally set bid/ask quotes over a finite time interval, to maximize her expected utility. The intensities of the orders she receives depend not only on the spreads she quotes, but also on unobservable factors modelled by a hidden Markov chain. We tackle this stochastic control problem under partial information with a model that unifies and generalizes many existing ones, combining several risk metrics and constraints, and using general decreasing intensity functionals. We use stochastic filtering, control and piecewise-deterministic Markov processes theory, to reduce the dimensionality of the problem and characterize the reduced value function as the unique continuous viscosity solution of its dynamic programming equation. We then solve the analogous full information problem and compare the results numerically through a concrete example. We show that the optimal full information spreads are biased when the exact market regime is unknown, and the MM needs to adjust for `regime risk' in terms of liquidity volatility and sensitivity to regime changes. This effect becomes higher the longer the waiting time in between orders. |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1902.01157&r=all |
| By: | Mathieu Martin; Zéphirin Nganmeni; Craig A. Tovey (Université de Cergy-Pontoise, THEMA) |
| Abstract: | We introduce a dominance relationship in spatial voting with Euclidean preferences, by treating voter ideal points as balls of radius δ. Values δ > 0 model imprecision or ambiguity as to voter preferences, or caution on the part of a social planner. The winning coalitions may be any consistent monotonic collection of voter subsets. We characterize the minimum value of δ for which the δ-core, the set of undominated points, is nonempty. In the case of simple majority voting, the core is the yolk center and δ is the yolk radius. Thus the δ-core both generalizes and provides a new characterization of the yolk. We then study relationships between the δ-core and two other concepts: the Ɛ-core and the finagle point. We prove that every fi nagle point must be within 2.32472 yolk radii of every yolk center, in all dimensions m ≥ 2. |
| Keywords: | Spatial voting, dominance, core, yolk, fi nagle. |
| JEL: | C62 C70 D71 D72 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2019-02&r=all |
| By: | Bergantiños, Gustavo; Lorenzo, Leticia |
| Abstract: | A planner wants to carry out a project involving several firms. In many cases the planner, for instance the Spanish Administration, includes in the contract a penalty clause that imposes a payment per day if the firms do not complete their activities or the project on time. We discuss two ways of including such penalty clauses in contracts. In the first the penalty applies only when the whole project is delayed. In the second the penalty applies to each firm that incurs a delay even if the project is completed on time. We compare the two penalty systems and find that the optimal penalty (for the planner) is larger in the second method, the utility of the planner is always at least as large or larger in the second case and the utility of the firms is always at least as large or larger in the first. Surprisingly, the final delay in the project is unrelated to which penalty system is chosen. |
| Keywords: | game theory; PERT; delays; penalties |
| JEL: | C72 |
| Date: | 2019–01–25 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:91718&r=all |
| By: | Shizuka Sekita (Kyoto Sangyo University, Graduate School, Division of Economics); Vikas Kakkar (City University of Hong Kong, Department of Economics and Finance); Masao Ogaki (Faculty of Economics, Keio University) |
| Abstract: | This paper considers the relationship between wealth, financial literacy and several other variables using data from Japan's first large-scale survey on financial literacy. Using an instrumental variables approach to account for possible endogeneity of financial literacy, we find that financial literacy has an economically large and positive impact on wealth accumulation. We also decompose financial literacy into 5 sub-categories and find that deposits literacy, risk literacy and debt literacy have significant impacts on wealth accumulation in Japan, whereas inflation literacy and insurance literacy do not. In addition to financial literacy, several variables suggested by behavioral economics, such as over-confidence, self-control, myopia and loss-aversion are also significant determinants of wealth. |
| Keywords: | Financial Literacy, Financial Education, Wealth Accumulation, Behavioral Biases, Retirement Preparation |
| JEL: | D12 D14 J26 |
| Date: | 2018–12–26 |
| URL: | http://d.repec.org/n?u=RePEc:keo:dpaper:2018-023&r=all |
| By: | Isabel Casas (BCAM; and Department of Business Economics, University of Southern Denmark); Xiuping Mao (School of Finance, Zhongnan University of Economics and Law); Helena Veiga (Department of Statistics and Instituto Flores de Lemus, Universidad Carlos III de Madrid; and BRU-IUL, Instituto Universitário de Lisboa) |
| Abstract: | This study explores the predictive power of new estimators of the equity variance risk premium and conditional variance for future excess stock market returns, economic activity, and financial instability, both during and after the last global financial crisis. These estimators are obtained from new parametric and semiparametric asymmetric extensions of the heterogeneous autoregressive model. Using these new specifications, we determine that the equity variance risk premium is a predictor of future excess stock returns, whereas conditional variance predicts them only for long horizons. Moreover, a comparison of the overall results reveals that the conditional variance gains predictive power during the global financial crisis period. Furthermore, both the variance risk premium and conditional variance are determined to be predictors of future financial instability, whereas conditional variance is determined to be the only predictor of economic activity for all horizons. Before the global financial crisis period, the new parametric asymmetric specification of the heterogeneous autoregressive model gains predictive power in comparison to previous work in the literature. However, the new time-varying coefficient models are the ones showing considerably higher predictive power for stock market returns and financial instability during the financial crisis, suggesting that an extreme volatility period requires models that can adapt quickly to turmoil. |
| Keywords: | Net measures, Nonparametric methods, Predictability, Realized variance, Variance risk premium, VIX |
| JEL: | C22 C51 C52 C53 C58 G17 |
| Date: | 2018–03–05 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2018-10&r=all |
| By: | O. A. Malafeyev; A. N. Malova; A. E. Tsybaeva |
| Abstract: | All people have to make risky decisions in everyday life. And we do not know how true they are. But is it possible to mathematically assess the correctness of our choice? This article discusses the model of decision making under risk on the example of project management. This is a game with two players, one of which is Investor, and the other is the Project Manager. Each player makes a risky decision for himself, based on his past experience. With the help of a mathematical model, the players form a level of confidence, depending on who the player accepts the strategy or does not accept. The project manager assesses the costs and compares them with the level of confidence. An investor evaluates past results. Also visit the case where the strategy of the player accepts the part. |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1901.08772&r=all |
| By: | Torben G. Andersen (Northwestern University and CREATES); Nicola Fusari (The Johns Hopkins University Carey Business School); Viktor Todorov (Northwestern University) |
| Abstract: | We explore the pricing of tail risk as manifest in index options across international equity markets. The risk premium associated with negative tail events displays persistent shifts, unrelated to volatility. This tail risk premium is a potent predictor of future equity returns, while option-implied volatility only forecasts the future return variation. Hence, compensation for negative jump risk is the primary driver of the equity premium across all indices, whereas the reward for pure diffusive variance risk is largely unrelated to future equity returns. We also document pronounced commonalities, suggesting a high degree of integration among the major global equity markets. |
| Keywords: | Equity Risk Premium, International Option Markets, Predictability, Tail Risk, Variance Risk Premium |
| JEL: | G12 G13 G15 G17 |
| Date: | 2018–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2018-02&r=all |
| By: | Oğuzhan Çepni (Central Bank of the Republic of Turkey, Anafartalar Mah. Istiklal Cad. No:10 06050, Ankara, Turkey); Riza Demirer (Department of Economics and Finance, Southern Illinois University Edwardsville, Edwardsville, IL 62026-1102, USA); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Christian Pierdzioch (Department of Economics, Helmut Schmidt University, Holstenhofweg 85, P.O.B.700822, 22008 Hamburg, Germany) |
| Abstract: | We show that time-varying risk aversion captures significant predictive information over excess returns on U.S. government bonds even after controlling for a large number of financial and macro factors. Including risk aversion improves the predictive accuracy at all horizons (one- to twelve-months ahead) for shorter maturity bonds and at shorter forecast horizons (one- to three-months ahead) for longer maturity bonds. Given the role of Treasury securities in economic forecasting models and portfolio allocation decisions, our findings have significant implications for investors, policy makers and researchers interested in accurately forecasting return dynamics for these assets. |
| Keywords: | Bond premia, Predictability, Risk aversion, Out-of-sample forecasts |
| JEL: | C22 C53 G12 G17 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201906&r=all |
| By: | Emilio Zanetti Chini (University of Pavia and CREATES) |
| Abstract: | I provide general frequentist framework to elicit the forecaster’s expected utility based on a Lagrange Multiplier-type test for the null of locality of the scoring rules associated to the probabilistic forecast. These are assumed to be observed transition variables in a nonlinear autoregressive model to ease the statistical inference. A simulation study reveals that the test behaves consistently with the requirements of the theoretical literature. The locality of the scoring rule is fundamental to set dating algorithms to measure and forecast probability of recession in US business cycle. An investigation of Bank of Norway’s forecasts on output growth leads us to conclude that forecasts are often suboptimal with respect to some simplistic benchmark if forecaster’s reward is not properly evaluated. |
| Keywords: | Business Cycle, Evaluation, Locality Testing, Nonlinear Time Series, Predictive Density, Scoring Rules, Scoring Structures |
| JEL: | C12 C22 C44 C53 |
| Date: | 2018–01–02 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2018-01&r=all |
| By: | Batabyal, Amitrajeet; Yoo, Seung Jick |
| Abstract: | Consider an aggregate economy of two cities. We study the impact that the use of utilitarian and Rawlsian policies by these two cities has on their ability to attract members of the the creative class. We first focus on the case in which both cities adopt utilitarian policies. Second, we analyze the case where both cities implement Rawlsian policies. Third, we study the case where one city uses a Rawlsian policy but the other city pursues a utilitarian policy. Fourth, we compare the policy outcomes in the first and the third cases above and show that if one city switches to a Rawlsian or more egalitarian objective when the other city remains utilitarian, the aggregate economy becomes less egalitarian. Finally, we compare the second and the third cases above and demonstrate that if one city switches to a Rawlsian or more egalitarian objective when the other city remains Rawlsian, the aggregate economy becomes more egalitarian. |
| Keywords: | City, Creative Class, Egalitarian, Rawlsian, Utilitarian |
| JEL: | D63 R11 |
| Date: | 2019–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:91827&r=all |