nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2019‒03‒04
24 papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Risk and Rationality:The Relative Importance of Probability Weighting and Choice Set Dependence By Adrian Bruhin; Maha Manai; Luis Santos-Pinto
  2. The Empirical Content of Binary Choice Models By Debopam Bhattacharya
  3. Just-noticeable difference as a behavioural foundation of the critical cost-efficiency index By Pawel Dziewulski
  4. We Are All Behavioral, More or Less: Measuring and Using Consumer-Level Behavioral Sufficient Statistics By Stango, Victor; Zinman, Jonathan
  5. Gig Economy: A Dynamic Principal-Agent Model By Zsolt Bihary; P\'eter Ker\'enyi
  6. Brave Boys and Play-it-Safe Girls: Gender Differences in Willingness to Guess in a Large Scale Natural Field Experiment By Iriberri, Nagore; Rey-Biel, Pedro
  7. Toward an Understanding of the Development of Time Preferences: Evidence from Field Experiments By James Andreoni; Michael A. Kuhn; John A. List; Anya Samek; Kevin Sokal; Charles Sprenger
  8. Nonparametric Counterfactuals in Random Utility Models By Yuichi Kitamura; J\"org Stoye
  9. Income Effects and Rationalizability in Multinomial Choice Models By Debopam Bhattacharya
  10. Heterogeneous Households under Uncertainty By Veronesi, Pietro
  11. Perceptions of Inequality and Redistribution: A Note By Roberto Iacono; Marco Ranaldi
  12. Farmers’ Preferences on Conditions in Manufacturing Pineapple Sale Contract in Rayong Province By Pichhannaronk, Parkpoom; Daloonpate, Apichart; Sanglestsawai, Santi
  13. Measuring Belief-Dependent Preferences without Information about Beliefs By Bellemare, Charles; Sebald, Alexander
  14. Real consequences matters: why hypothetical biases in the valuation of time persist even in controlled lab experiments By Ondřej Krčál; Rostislav Staněk; Bára Karlínová; Stefanie Peer
  15. The Knightian Uncertainty Hypothesis: Unforeseeable Change and Muth’s Consistency Constraint in Modeling Aggregate Outcomes By Roman Frydman; Søren Johansen; Anders Rahbek; Morten Nyboe Tabor
  16. Mean-field moral hazard for optimal energy demand response management By Romuald Elie; Emma Hubert; Thibaut Mastrolia; Dylan Possama\"i
  17. Influencing factors that determine the usage of the crowd-shipping services By Tho V. Le; Satish V. Ukkusuri
  18. Toward a cognitive science of markets: Economic agents as sense-makers By Johnson, Samuel G. B.
  19. Interview of Peter J. Hammond By Mongin, Philippe
  20. Efficient Incentives in Social Networks: "Gamification" and the Coase Theorem By Daske, Thomas
  21. Rational inattention in hiring decisions By Acharya, Sushant; Wee, Shu Lin
  22. Preference Heterogeneity, Inflation, and Welfare By Michael Patrick Curran; Scott J. Dressler
  23. Demand Estimation with Strategic Complementarities: Sanitation in Bangladesh By Guiteras, Raymond; Levinsohn, James A; Mobarak, Ahmed Mushfiq
  24. Anticipation of deteriorating health and information avoidance By Schünemann, Johannes; Strulik, Holger; Trimborn, Timo

  1. By: Adrian Bruhin; Maha Manai; Luis Santos-Pinto
    Abstract: The existing literature on choice under risk suggests that probability weighting and choice set dependence both influence risky choices. However, they have not been tested jointly. We design an incentivized laboratory experiment to assess the relative importance of probability weighting and choice set dependence both non-parametrically and with a structural model. Our design uses binary choices between lotteries that may trigger Allais Paradoxes. To reliably discriminate between probability weighting and choice set dependence, we manipulate the lotteries’ correlation structure while keeping their marginal distributions constant. The non-parametric analysis reveals that probability weighting and choice set dependence jointly play a role in describing aggregate choices. To take potential heterogeneity into account parsimoniously, we estimate a structural model based on a finite mixture approach. The model classifies subjects into three distinct types: a Cumulative Prospect Theory (CPT) type whose choices are primarily driven by probability weighting, a Salience Theory (ST) type whose choices are predominantly driven by choice set dependence, and an Expected Utility Theory (EUT) type. The structural model uncovers substantial heterogeneity in risk preferences: 38% of subjects are CPT-types, 34% are ST-types, and 28% are EUT-types. This classification of subjects into types also predicts preference reversals out-of-sample. Overall, these results show that probability weighting and choice set dependence play a similarly important role in describing risky choices. Beyond the domain of choice under risk, they may also help to improve our understanding of consumer, investor, and judicial choices.
    Keywords: Choice under Risk, Choice Set Dependence, ProbabilityWeighting, Salience Theory, Preference Reversals
    JEL: D81 C91 C49
    Date: 2019–02
  2. By: Debopam Bhattacharya
    Abstract: Empirical demand models used for counterfactual predictions and welfare analysis must be rationalizable, i.e. theoretically consistent with utility maximization by heterogeneous consumers. We show that for binary choice under general unobserved heterogeneity, rationalizability is equivalent to a pair of Slutsky-like shape-restrictions on choice-probability functions. The forms of these restrictions differ from Slutsky-inequalities for continuous goods. Unlike McFadden-Richter's stochastic revealed preference, our shape-restrictions (a) are global, i.e. their forms do not depend on which and how many budget-sets are observed, (b) are closed-form, hence easy to impose on parametric/semi/non-parametric models in practical applications, and (c) provide computationally simple, theory-consistent bounds on demand and welfare predictions on counterfactual budget-sets.
    Date: 2019–02
  3. By: Pawel Dziewulski (Department of Economics, University of Sussex, Brighton, UK)
    Abstract: Critical cost-efficiency index (or CCEI), proposed in Afriat (1973) and Varian (1990), is one of the most commonly used measures of departures from rationality. We show that this index is equivalent to a particular notion of the just-noticeable difference, that is, a measure of dissimilarity between alternatives that is sufficient for the agent to tell them apart. Therefore, we show that CCEI evaluates the consumer's cognitive inability to discriminate among options.
    Keywords: utility maximisation, generalised axiom of revealed preference, critical costefficiency index, interval order, just-noticeable difference
    JEL: C14 C60 C61 D11 D12
    Date: 2019–02
  4. By: Stango, Victor (University of California, Davis); Zinman, Jonathan (Dartmouth College)
    Abstract: Can a behavioral sufficient statistic empirically capture cross-consumer variation in behavioral tendencies and help identify whether behavioral biases, taken together, are linked to material consumer welfare losses? Our answer is yes. We construct simple consumer-level behavioral sufficient statistics—“B-counts”—by eliciting seventeen potential sources of behavioral biases per person, in a nationally representative panel, in two separate rounds nearly three years apart. B-counts aggregate information on behavioral biases within-person. Nearly all consumers exhibit multiple biases, in patterns assumed by behavioral sufficient statistic models (a la Chetty), and with substantial variation across people. B-counts are stable within-consumer over time, and that stability helps to address measurement error when using B-counts to model the relationship between biases, decision utility, and experienced utility. Conditional on classical inputs—risk aversion and patience, life-cycle factors and other demographics, cognitive and non-cognitive skills, and financial resources—B-counts strongly negatively correlate with both objective and subjective aspects of experienced utility. The results hold in much lower-dimensional models employing “Sparsity B-counts” based on bias subsets (a la Gabaix) and/or fewer covariates, illuminating lower-cost ways to use behavioral sufficient statistics to help capture the combined influence of multiple behavioral biases for a wide range of research questions and applications.
    Keywords: behavioral bias; consumer spending
    JEL: C83 D1 D6 D9
    Date: 2019–02–22
  5. By: Zsolt Bihary; P\'eter Ker\'enyi
    Abstract: The gig economy, where employees take short-term, project-based jobs, is increasingly spreading all over the world. In this paper, we investigate the employer's and the worker's behavior in the gig economy with a dynamic principal-agent model. In our proposed model the worker's previous decisions influence his later decisions through his dynamically changing participation constraint. He accepts the contract offered by the employer when his expected utility is higher than the irrational valuation of his effort's worth. This reference point is based on wages he achieved in previous rounds. We formulate the employer's stochastic control problem and derive the solution in the deterministic limit. We obtain the feasible net wage of the worker, and the profit of the employer. Workers who can afford to go unemployed and need not take a gig at all costs will realize high net wages. Conversely, far-sighted employers who can afford to stall production will obtain high profits.
    Date: 2019–02
  6. By: Iriberri, Nagore; Rey-Biel, Pedro
    Abstract: We study gender differences in willingness to guess using approximately 10,000 multiple-choice math tests, where for half of the questions, both wrong answers and omitted questions are scored 0, and for the other half, wrong answers are scored 0 but omitted questions are scored +1. Using a within-participant regression analysis, we find that female participants leave significantly more omitted questions than males when there is a reward for omitted questions. This gender difference, which is stronger among high ability and older participants, hurts female performance as measured by the final score and position in the ranking. In a subsequent survey, female participants showed lower levels of confidence and higher risk aversion, which may explain this differential behavior. When both are considered, risk aversion is the main factor explaining the gender differential in the willingness to guess. A scoring rule that is gender neutral must use non-differential scoring between wrong answers and omitted questions.
    Keywords: confidence; gender differences; natural field experiment; perceived ability in math; risk preferences; willingness to guess
    JEL: C93 D81 I20 J16
    Date: 2019–02
  7. By: James Andreoni; Michael A. Kuhn; John A. List; Anya Samek; Kevin Sokal; Charles Sprenger
    Abstract: Time preferences have been correlated with a range of life outcomes, yet little is known about their early development. We conduct a field experiment to elicit time preferences of over 1,200 children ages 3-12, who make several intertemporal decisions. To shed light on how such primitives form, we explore various channels that might affect time preferences, from background characteristics to the causal impact of an early schooling program that we developed and operated. Our results suggest that time preferences evolve substantially during this period, with younger children displaying more impatience than older children. We also find a strong association with race: black children, relative to white or Hispanic children, are more impatient. Finally, assignment to different schooling opportunities is not significantly associated with child time preferences.
    JEL: C9 C93 D03
    Date: 2019–02
  8. By: Yuichi Kitamura; J\"org Stoye
    Abstract: We bound features of counterfactual choices in the nonparametric random utility model of demand, i.e. if observable choices are repeated cross-sections and one allows for unrestricted, unobserved heterogeneity. In this setting, tight bounds are developed on counterfactual discrete choice probabilities and on the expectation and c.d.f. of (functionals of) counterfactual stochastic demand.
    Date: 2019–02
  9. By: Debopam Bhattacharya
    Abstract: In multinomial choice settings, Daly-Zachary (1978) and Armstrong-Vickers (2015) provided closed-form conditions, under which choice probability functions can be rationalized via random utility models. A key condition is Slutsky symmetry. We first show that in the multinomial context, Daly-Zachary's Slutsky symmetry is equivalent to absence of income-effects. Next, for general multinomial choice that allows for income-effects, we provide global shape restrictions on choice probability functions, which are shown to be sufficient for rationalizability. Finally, we outline nonparametric identification of preference distributions using these results. The theory of linear partial differential equations plays a key role in our analysis.
    Date: 2019–02
  10. By: Veronesi, Pietro
    Abstract: I characterize a dynamic economy under general distributions of households' risk tolerance, endowments, and beliefs about long-term growth. As the economy expands and the stock market rises (a) the fraction of households with declining consumption-share increases; (b) the wealth-share of high risk-tolerant households increases; (c) richer households' wealth display a higher CAPM beta; and (d) households' portfolios change qualitatively. A log-utility investor for instance borrows in contractions but lends in expansions. Variations in uncertainty and expected growth generate trading volume due to risk sharing. Higher uncertainty increases stock prices, risk premiums, volatility, wealth inequality and the dispersion of portfolio holdings, consistently with the events in the late 1990s.
    Date: 2019–01
  11. By: Roberto Iacono (Norwegian University of Science and Technology (NTNU)); Marco Ranaldi (Paris1 Panthéon-Sorbonne et Paris School of Economics)
    Abstract: This paper shows that perceptions of inequality are a key factor in the formation of preferences for redistribution and thereby in the determination of the equilibrium redistribution level. We build on the novel stylized facts provided by the recent empirical and experimental literature on perceptions of income inequality. In brief, the emerging consensus is that agents incorrectly estimate the shape of the income distribution because of limited information. Agents with income above the mean believe they are poorer than they actually are, and agents with income below the mean believe themselves to be richer. We revisit the standard framework on the political economy of redistribution and extend it in two ways. First, we assume a more general two-sided inequality aversion. Second, we incorporate perceptions of income inequality in the model. We show analytically that the equilibrium redistribution level is crucially determined by the interplay between the information treatment correcting the bias in perceptions of inequality and fairness considerations specified by the degree of inequality aversion. By doing this, we add (biased) perceptions of inequality to the list of potential factors explaining why, notwithstanding high levels of inequality, in many countries, an increase in the desire for redistribution has not been observed
    Keywords: Meltzer-Richard Model; Perceived Inequality; Inequality Aversion; Redistributive Preferences
    JEL: D63 H2 H3
    Date: 2019–01
  12. By: Pichhannaronk, Parkpoom; Daloonpate, Apichart; Sanglestsawai, Santi
    Abstract: This paper aimed to evaluate farmers’ preferences on condition attributes in a manufacturing pineapple sale contract. Data were collected from 300 pineapple farmers in Rayong province in the cropping season 2015 using paper-based questionnaires. Conjoint analysis model was employed to analyze the attribute ranking. Consequently, farmers were grouped by using cluster analysis in order to study attribute ranking for each group. The analytical results revealed that farmers’ preferences were affected respectively by coverage-crop insurance option, price option, contract quantity and input supply arrangement. Finally, the attribute set that was found to obtain the highest total utility included guaranteed minimum prices, total quantity purchase and partial coverage-crop insurance. The farmers were segmented in 2 groups due to their preferences. The first group of farmers mostly had their planted areas between 20-40 rais and attended at least one training program concerning agricultural knowledge. The most important attribute of the first group was coverage-crop insurance option. Most of the second-group farmers had a small area planted and never attended the training. The price option was the most importance attribute for the second group. The suggestion from this study was that farmers, pineapple manufacturers and related government sectors jointly set a reasonably minimum guaranteed price that is consistent to the cost of production. Moreover, coverage-crop insurance could be added in a manufacturing pineapple sale contact in order to increase the farmers' confidence in their production.
    Keywords: Institutional and Behavioral Economics
    Date: 2017–02–28
  13. By: Bellemare, Charles (Université Laval); Sebald, Alexander (University of Copenhagen)
    Abstract: We derive bounds on the causal effect of belief-dependent preferences (reciprocity and guilt aversion) on choices in sequential two-player games without exploiting information or data on the (higher-order) beliefs of players. We show how informative bounds can be derived by exploiting a specific invariance property common to those preferences. We illustrate our approach by analyzing data from an experiment conducted in Denmark. Our approach produces tight bounds on the causal effect of reciprocity in the games we consider. These bounds suggest there exists significant reciprocity in our population – a result also substantiated by the participants' answers to a post-experimental questionnaire. On the other hand, our approach yields high implausible estimates of guilt aversion. We contrast our estimated bounds with point estimates obtained using data on self-declared higher-order beliefs, keeping all other aspects of the model unchanged. We find that point estimates fall within our estimated bounds suggesting that elicited higher-order belief data in our experiment is weakly (if at all) affected by a potential endogeneity problem due to e.g. false consensus effects.
    Keywords: belief-dependent preferences, partial identification
    JEL: C93 D63 D84
    Date: 2019–02
  14. By: Ondřej Krčál (Masaryk University); Rostislav Staněk (Masaryk University); Bára Karlínová (Masaryk University); Stefanie Peer (Vienna University of Economics and Business, Masaryk University)
    Abstract: In a controlled lab experiment, we investigate hypothetical biases in the value of time by comparing stated preference (SP) and revealed preference (RP) values attached to unexpected waiting times. The SP and RP choice sets are identical in terms of design with the only difference being that the RP choices have real consequences in terms of unexpected waiting times and monetary incentives. We find a substantial hypothetical bias with the average SP value of time being only 71% of the corresponding RP value. The bias is mainly driven by participants who have scheduling constraints during the time of the unexpected wait. Scheduling constraints are taken into account to a much lesser extent in the SP setting than in the RP setting, presumably because only in the latter, the consequences of ignoring them are costly. We find evidence that this effect is stronger for persons with relatively low cognitive ability.
    Keywords: valuation of time, hypothetical bias, stated preference, revealed preference, waiting time
    Date: 2019–02
  15. By: Roman Frydman (Department of Economics, New York University); Søren Johansen (Department of Economics, University of Copenhagen, Denmark); Anders Rahbek (Department of Economics, University of Copenhagen, Denmark); Morten Nyboe Tabor (Department of Economics, University of Copenhagen, Denmark)
    Abstract: This paper proposes the Knightian Uncertainty Hypothesis (KUH), a new approach to macroeconomics and finance theory. KUH rests on a novel mathematical framework that characterizes both measurable and Knightian uncertainty about economic outcomes. Relying on this framework and Muth’s pathbreaking hypothesis, KUH represents participants’ forecasts to be consistent with both uncertainties. KUH thus enables models of aggregate outcomes that 1) are premised on market participants’ rationality, and 2) accord a role to both fundamental and psychological (and other non-fundamental) factors in driving outcomes. The paper also suggests how a KUH model’s quantitative predictions can be confronted with time-series data.
    Keywords: Unforeseeable Change; Knightian Uncertainty; Muth’s Hypothesis; Model Ambiguity; REH; Behavioral Finance
    JEL: C02 C51 E00 D84 E00
    Date: 2019–02–21
  16. By: Romuald Elie; Emma Hubert; Thibaut Mastrolia; Dylan Possama\"i
    Abstract: We study the problem of demand response contracts in electricity markets by quantifying the impact of considering a mean-field of consumers, whose consumption is impacted by a common noise. We formulate the problem as a Principal-Agent problem with moral hazard in which the Principal - she - is an electricity producer who observes continuously the consumption of a continuum of risk-averse consumers, and designs contracts in order to reduce her production costs. More precisely, the producer incentivises the consumers to reduce the average and the volatility of their consumption in different usages, without observing the efforts they make. We prove that the producer can benefit from considering the mean-field of consumers by indexing contracts on the consumption of one Agent and aggregate consumption statistics from the distribution of the entire population of consumers. In the case of linear energy valuation, we provide closed-form expression for this new type of optimal contracts that maximises the utility of the producer. In most cases, we show that this new type of contracts allows the Principal to choose the risks she wants to bear, and to reduce the problem at hand to an uncorrelated one.
    Date: 2019–02
  17. By: Tho V. Le; Satish V. Ukkusuri
    Abstract: The objective of this study is to understand how senders choose shipping services for different products, given the availability of both emerging crowd-shipping (CS) and traditional carriers in a logistics market. Using data collected from a US survey, Random Utility Maximization (RUM) and Random Regret Minimization (RRM) models have been employed to reveal factors that influence the diversity of decisions made by senders. Shipping costs, along with additional real-time services such as courier reputations, tracking info, e-notifications, and customized delivery time and location, have been found to have remarkable impacts on senders' choices. Interestingly, potential senders were willing to pay more to ship grocery items such as food, beverages, and medicines by CS services. Moreover, the real-time services have low elasticities, meaning that only a slight change in those services will lead to a change in sender-behavior. Finally, data-science techniques were used to assess the performance of the RUM and RRM models and found to have similar accuracies. The findings from this research will help logistics firms address potential market segments, prepare service configurations to fulfill senders' expectations, and develop effective business operations strategies.
    Date: 2019–02
  18. By: Johnson, Samuel G. B.
    Abstract: Behavioral economics characterizes decision-makers using psychologically-informed models. Cognitive science produces psychologically-informed models. Why don't these disciplines talk more? Here, the author presents several arguments for why cognitive science should inform behavioral economics - it characterizes internal psychological states, builds a richer conception of human nature, pays equal attention to cognition's successes and failures, embraces multidisciplinary insights, and avoids blind spots produced by behavioral economics' intellectual lineage. The author illustrates these principles using the cognitive science of sense-making - how humans understand information - including mental tools such as heuristics, stories, and theories. The science of mind can produce new insights to enrich economics.
    Keywords: cognitive science,behavioral economics,experimental economics,behavioral finance,economics methodology,information processing,decision-making under uncertainty
    JEL: A12 B4 D01 D11 D7 D8 D9
    Date: 2019
  19. By: Mongin, Philippe (GREGHEC, CNRS & HEC Paris)
    Abstract: Following an initiative of Social Choice and Welfare, this is the result of an interview conducted by email exchange during the period from July 2017 to February 2018, with minor adjustments later in 2018. Apart from some personal history, topics discussed include: (i) social choice, especially with interpersonal comparisons of utility; (ii) utilitarianism, including Harsanyi’s contributions; (iii) consequentialism in decision theory and in ethics; (iv) the independence axiom for decisions under risk; (v) welfare economics under uncertainty; (vi) incentive compatibility and strategy-proof mechanisms, especially in large economies; (vii) Pareto gains from trade, and from migration; (viii) cost–benefit analysis and welfare measurement; (ix) the possible future of normative economics
    Date: 2019
  20. By: Daske, Thomas
    Abstract: This study explores mechanism design for networks of interpersonal relationships. Agents' social (i.e., altruistic or spiteful) preferences and private payoffs are all subject to asymmetric information; utility is (quasi-)linear, types are independent. I show that any network of at least three agents can resolve any allocation problem with a mechanism that is Bayesian incentive-compatible, ex-interim individually rational, and ex-post Pareto-efficient (also ex-post budget-balanced). By contrast, a generalized Myerson-Satterthwaite theorem is established for two agents. The central tool to exploit the asymmetry of information about agents' social preferences is "gamification": Resolve the agents' allocation problem with an efficient social-preference robust mechanism; ensure agents' participation with the help of a mediator, some network member, who complements that mechanism with an unrelated hawk-dove like game between the others, a game that effectively rewards (sanctions) strong (poor) cooperation at the expense (to the benefit) of the mediator. Ex interim, agents (and the mediator) desire this game to be played, for it provides them with a platform to live out their propensities to cooperate or compete. - A figurative example is a fund-raiser, hosted by the "mediator", complemented with awarding the best-dressed guest.
    Keywords: networks,social preferences,mechanisms,gamification,Coase theorem
    JEL: C70 D62 D64 D82 D85
    Date: 2019
  21. By: Acharya, Sushant (Federal Reserve Bank of New York); Wee, Shu Lin (Carnegie Mellon University)
    Abstract: We provide an information-based theory of matching efficiency fluctuations. Rationally inattentive firms have limited capacity to process information and cannot perfectly identify suitable applicants. During recessions, higher losses from hiring unsuitable workers cause firms to be more selective in hiring. When firms cannot obtain sufficient information about applicants, they err on the side of caution and accept fewer applicants to minimize losses from hiring unsuitable workers. Pro-cyclical acceptance rates drive a wedge between meeting and hiring rates, explaining fluctuations in matching efficiency. Quantitatively, our model replicates the joint behavior of unemployment rates and matching efficiency observed since the Great Recession.
    Keywords: rational inattention; hiring behavior; matching efficiency; composition of unemployed
    JEL: D8 E32 J63 J64
    Date: 2019–02–01
  22. By: Michael Patrick Curran (Department of Economics, Villanova School of Business, Villanova University); Scott J. Dressler (Department of Economics, Villanova School of Business, Villanova University)
    Abstract: This paper assesses the welfare implications of long-run inflation in an environment with essential money, a competing illiquid asset, and potential ex-ante heterogeneity of households with respect to their behavioral measures of risk aversion and elasticity of intertemporal substitution. The results show that the relative liquidity position of households’ portfolio as well as potential inter-cohort transfers of resources can deliver fewer welfare costs to inflation than has been previously reported, and in some instances net welfare benefits to low levels of positive inflation. These results hold in versions of the model calibrated to both US and euro area data.
    Keywords: Inflation; Welfare; Recursive Preferences
    JEL: E21 E41 E50
    Date: 2019–02
  23. By: Guiteras, Raymond; Levinsohn, James A; Mobarak, Ahmed Mushfiq
    Abstract: For many products, the utility of adoption depends on the share of other households that adopt. We estimate a structural model of demand that allows for these inter-dependencies. We apply our model to the adoption of household latrines - a technology that has large consequences for public health. We estimate the model using data from a large-scale experiment covering over 18,000 households in 380 communities in rural Bangladesh, where we randomly assigned incentives to purchase latrines. Subsidies were randomly assigned at the household level to identify the direct effect of price, and subsidy saturation was randomly varied at the community level to identify strategic complementarities in demand. We conduct counter-factual simulations to analyze the policymaker's tradeoffs along price, saturation and scope margins: To raise aggregate latrine adoption, is it better to intensely subsidize a few, or widely disperse subsidies across households or communities? We also analyze the effects of targeting subsidies on the basis of household poverty, social position, or neighborhood population density. Finally, we use additional experiments to explore mechanisms underlying the complementarity in demand, and find that shame and changing social norms are driving factors.
    Date: 2019–01
  24. By: Schünemann, Johannes; Strulik, Holger; Trimborn, Timo
    Abstract: The anticipation of bad future events reduces currently experienced happiness and it may through this channel elicit detrimental behavioral responses. We explore this idea in the context of endogenous health and aging. We integrate physiological aging into a life-cycle model, calibrate it with data from gerontology, and analyze how the anticipation of a deteriorating state of health affects health spending, life expectancy, and the value of life. In counterfactual computational experiments we compare behavior and outcomes of anticipating and non-anticipating individuals and find that anticipation decreases lifetime utility, health investments, and longevity. We then use the model to contribute to the literature on information avoidance. We find that anticipation provides a strong motive to avoid medical testing even when the likelihood of developing a certain disease is high and the cost for the test is low.
    Keywords: Health,Anticipation,Longevity,Health Behavior,Value of Life,Information Avoidance
    JEL: D11 D91 I12 J17
    Date: 2019

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