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on Utility Models and Prospect Theory |
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Issue of 2019‒10‒07
28 papers chosen by |
| By: | Annette Krauss (Dept. of Banking and Finace, University of Zurich); Donald J. Brown (Dept. of Economics, Yale University) |
| Abstract: | This working paper extends the methodology of non-smooth affective portfolio theory (APT) for eliciting (IR)rational preferences of investors endowed with continuous quasilinear utility functions, where assets are portfolios of risky and ambiguous state-contingent claims. The elicitation is a solution of the affective Afriat inequalities;see technical appendix 1. Solving the smooth affective Afriat inequalities is Np-hard; see technical appendices 2, 3, and 4. The proposed extension is a methodology for the elicitation of (IR)rational preferences of individuals endowed with random continuous quasilinear utility functions deï¬ ned over ï¬ nite subsets of discrete social goods as a refutable model of social exclusion in the incomplete markets for social goods; see technical appendices 5 and 6. The methods of elicitation are generalized estimating equations (GEE) and alternating logistic regression (ALR); see technical appendices; 7 and 8. |
| Keywords: | Rationality, Behavioral Finance, Well Being |
| JEL: | D91 I31 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2202r&r=all |
| By: | Raquel M. Gaspar; Paulo M. Silva |
| Abstract: | This study supports the use of behavioural finance to explain the popularity of portfolio insurance. Portfolio insurance strategies are important financial solutions sold to institutional and individual investors, that protect against downside risk while maintaining some upside valuation potential. The way some of these strategies are engineered has been criticised, and portfolio insurance itself blamed for increasing market volatility in depressed markets. Despite this, investors keep on buying portfolio insurance that has a solid market share. This study contributes to understand the phenomenon. We compare investors' decision using two distinct frameworks: expected utility theory and behavioural theories. Based upon Monte Carlo simulation techniques we compare portfolio insurance strategies against uninsured basic benchmark strategies. We conclude that cumulative prospect theory may be a viable framework to explain the popularity of portfolio insurance. However, among portfolio insurance strategies, naive strategies seem to be preferable to most commonly traded strategies. |
| Keywords: | portfolio insurance·expected utility·prospect theory·Monte Carlo simulation |
| JEL: | G11 G13 G17 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp0922019&r=all |
| By: | Jose Apesteguia; Miguel Ángel Ballester; Angelo Gutierrez |
| Abstract: | We develop a simple, tractable and sound stochastic framework for the joint treatment of risk and time preferences, in order to facilitate the estimation of risk and time attitudes. In so doing we: (i) study deterministic models of risk and time preferences paying special attention to their comparative statics, (ii) embed the deterministic models and their comparative statics within the random utility framework, and (iii) show how to estimate them, illustrating this exercise on several experimental datasets. |
| Keywords: | risk preferences, time preferences, comparative statics, stochastic choice; random utility models, discrete choice |
| JEL: | C01 D01 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1117&r=all |
| By: | Jose Apesteguia; Miguel Ángel Ballester; Angelo Gutierrez |
| Abstract: | We develop a simple, tractable and sound stochastic framework for the joint treatment of risk and time preferences, in order to facilitate the estimation of risk and time attitudes. In so doing we: (i) study deterministic models of risk and time preferences paying special attention to their comparative statics, (ii) embed the deterministic models and their comparative statics within the random utility framework, and (iii) show how to estimate them, illustrating this exercise on several experimental datasets. |
| Keywords: | Risk preferences, time preferences, comparative statics, stochastic choice, random utility models, discrete choice. |
| JEL: | C01 D01 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1671&r=all |
| By: | Abhik Ghosh; Preety Shreya; Banasri Basu |
| Abstract: | In this paper we derive the maximum entropy characteristics of a particular rank order distribution, namely the discrete generalized beta distribution, which has recently been observed to be extremely useful in modelling many several rank-size distributions from different context in Arts and Sciences, as a two-parameter generalization of Zipf's law. Although it has been seen to provide excellent fits for several real world empirical datasets, the underlying theory responsible for the success of this particular rank order distribution is not explored properly. Here we, for the first time, provide its generating process which describes it as a natural maximum entropy distribution under an appropriate bivariate utility constraint. Further, considering the similarity of the proposed utility function with the usual logarithmic utility function from economic literature, we have also explored its acceptability in universal modeling of different types of socio-economic factors within a country as well as across the countries. The values of distributional parameters estimated through a rigorous statistical estimation method, along with the $entropy$ values, are used to characterize the distributions of all these socio-economic factors over the years. |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1909.12542&r=all |
| By: | Alex Dickson (Department of Economics, University of Strathclyde, Glasgow, UK, G4 0QU); Ian A. MacKenzie (School of Economics, The University of Queensland); Petros G. Sekeris (Montpellier Business School, Montpellier, 34080, France) |
| Abstract: | In this article we investigate oligopolies where firm decision makers have multiple objectives. We focus on cases where the decision maker is incentivized by profit, and by revenue. Our innovation—motivated by the internal scrutiny that is often placed on revenue—is that managers derive utility from revenue in a potentially non-linear fashion. This allows for incremental changes in revenue to have different incentive effects when it comes to production choice, depending on the amount of revenue generated by the firm. We show that this intuitively appealing extension to the revenue maximisation model reverses some conventional results of that model: we derive conditions where decision makers may actually increase output in the presence of demand contractions. Whether a decision maker increases or decreases output in the presence of a demand shock depends on the concavity of their utility function with respect to revenue. Our findings help us in understanding cases of output growth in the presence of negative demand shocks. |
| Keywords: | Oligopoly; non-profit maximization; delegation |
| JEL: | L13 L21 |
| Date: | 2019–09–24 |
| URL: | http://d.repec.org/n?u=RePEc:qld:uq2004:611&r=all |
| By: | Alistair Ulph; Luca Panzone; Denis Hilton |
| Abstract: | Literature in economics and psychology on moral behaviour explores the contexts in which people act in ways that are consistent or inconsistent with their past actions. Such inconsistencies appear to violate economists' assumption of rational consumer behaviour. In this note we show that a simple model of rational (utility-maximising) consumer behaviour, in both static and dynamic forms, can explain both consistent and inconsistent behaviour. |
| Keywords: | behavioural consistency, moral self-regulation, moral licensing, consumer behavior, sustainable consumption |
| JEL: | D11 H41 M31 Q56 Q58 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7857&r=all |
| By: | Yu Zhang; Donald Haurin |
| Abstract: | This study estimates individuals' attitudes toward and perceptions of ambiguity of house prices and stock prices, using experiment data from the Rand American Life Panel (ALP) survey. We estimate two important parameters in multiple prior models and -MaxMin ambiguity preferences: the degree of ambiguity aversion and the degree of confidence in the reference prior distribution of future prices, this being a measurement of the perceived level of ambiguity. Regarding attitudes, we find that individuals are slightly ambiguity seeking with regard to house prices while they are slightly ambiguity averse with regard to stock prices. Their degree of confidence in the reference distribution for stocks is lower than for house prices. We also find that increased state-level house price volatility during the past year and growth of house price in the past three years increase perceived ambiguity. Moreover, ambiguity matters in that ambiguity-averse renters are less likely to buy a house. Correspondingly, ambiguity-averse stock investors tend to have less stock holdings. |
| Keywords: | Ambiguity; Homeownership; House Prices; risk aversion |
| JEL: | R3 |
| Date: | 2019–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:arz:wpaper:eres2019_75&r=all |
| By: | Giuseppe Attanasi; Ylenia Curci; Patrick Llerena; Maria del Pino Ramos-Sosa; Adriana Carolina Pinate; Giulia Urso |
| Abstract: | This article presents a mixed-methods research in the field of creativity. By making use of experiments and a questionnaire, it analyses how creativity is affected by three factors: i) motivation, ii) individuals’ attitudes towards risk and ambiguity and iii) social context. Each one of these factors has been extensively investigated in the theoretical and empirical literature getting to results still open to discussion. In particular, this research focuses on two aspects. First, we try to shed some light on the controversial findings linking risk taking and creativity that exist in the economic and psychology literature. To do so, we test the hypotheses that self perception of creative abilities may play a role in establishing a riskcreativity positive correlation. Second, being the three factors strongly influenced by culture, the study investigates whether the impacts on creativity may differ in diverse geographical locations. Following Attanasi et al. (2019), we exploit data from experiments performed in main cities of one eastern and one western country: Ho Chi Minh city (Vietnam) and Strasbourg (France). The information to build the risk and ambiguity factor derive from risk and ambiguity elicitation via lotteries. To account for motivation, different organizational scenarios are set in experimental treatments (financial incentives vs non financial incentives to collaborate). Finally, information on social context and self perception of creative abilities are collected through a self administrated questionnaire. In our analysis, we find that risk aversion, social habits and leisure activities have a positive effect on the creative performance of the French participants, while for Vietnamese the intrinsic motivation and the perception of their own creative capacities are positive correlated with creative scores. Our results suggest that in a country like France, social context has a strong influence on individual creativity, while for Vietnam individual features play a role in creativity, suggesting that the socio-cultural context has different impacts on creativity. |
| Keywords: | Cexperiments, risk, ambiguity, self-perceived creativity, motivation, geographical location, social context. |
| JEL: | I23 O31 O32 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2019-38&r=all |
| By: | Robert D. Cairns; Vincent Martinet |
| Abstract: | From any state of economic and environmental assets, the maximin value defines the highest level of utility that can be sustained forever. Along any development path, the maximin value evolves over time according to investment decisions. If the current level of utility is lower than this value, there is room for growth of both the utility level and the maximin value. For any resource allocation mechanism (ram) and economic dynamics, growth is limited by the long-run level of the maximin value, which is an endogenous dynamic sustainability constraint. If utility reaches this limit, sustainability imposes growth to stop, and the adoption of maximin decisions instead of the current ram. We illustrate this pattern in two canonical models, the simple fishery and a two-sector economy with a nonrenewable resource. We discuss what our results imply for the assessment of sustainability in the short- and the long-run in non-optimal economies. |
| Keywords: | sustainable development, sacrifice, growth, maximin value, sustainability improvement, resource allocation mechanism, non-optimal economies |
| JEL: | O44 Q56 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7845&r=all |
| By: | Howard Cooke; Rianne Appel-Meulenbroek; Theo Arentze |
| Abstract: | The importance of CRE decision-making, in particular the link through to the strategic decision making of the firm, has been recognised in a number of papers over the last 30 years. However, whilst some papers have focussed on the alignment of CRE and others on specific issues such as acquisitions, there is a paucity of research on the CRE decision-making process itself and the behaviour of the decision-maker. A semi-structured interview technique (Causal Network Elicitation Technique) is used to investigate the Mental Representation adopted by CRE decision-makers when faced with a particular scenario. The technique uses Decision Network, an extension of Bayesian Belief Network methodology, as a mechanism for making inferences. A Causal Network is developed to identify, decision, situational, attribute and benefit variables, together with utility weights to represent the Mental Representation of the decision maker’s decision. |
| Keywords: | Causal Network; Corporate real estate; Decision Network; Decision-making; Mental Representation |
| JEL: | R3 |
| Date: | 2019–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:arz:wpaper:eres2019_53&r=all |
| By: | George-Marios Angeletos (M.I.T.); Karthik Sastry (Massachusetts Institute of Technology) |
| Abstract: | Should a policymaker offer forward guidance by committing to a path for the policy instrument or a target for an equilibrium outcome? We study how the optimal approach depends on plausible bounds on agents’ depth of knowledge and rationality. Agents make mistakes in predicting, or reasoning about, the behavior of others and the GE effects of policy. The optimal policy minimizes the bite of such mistakes on implementability and welfare. This goal is achieved by fixing and com- municating an outcome target if and only if the GE feedback is strong enough. Our results suggest that central banks should stop talking about interest rates and start talking about unemployment when faced with a steep Keynesian cross or a prolonged liquidity trap. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1537&r=all |
| By: | Abootaleb Shirvani; Stoyan V. Stoyanov; Frank J. Fabozzi; Svetlozar T. Rachev |
| Abstract: | In this paper, we revisit the equity premium puzzle reported in 1985 by Mehra and Prescott. We show that the large equity premium that they report can be explained by choosing a more appropriate distribution for the return data. We demonstrate that the high-risk aversion value observed by Mehra and Prescott may be attributable to the problem of fitting a proper distribution to the historical returns and partly caused by poorly fitting the tail of the return distribution. We describe a new distribution that better fits the return distribution and when used to describe historical returns can explain the large equity risk premium and thereby explains the puzzle. |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1909.13019&r=all |
| By: | Claes Ek; Margaret Samahita |
| Abstract: | Economic agents commonly use commitment devices to limit impulsive behavior in the interest of long-term goals. We provide evidence for excess demand for commitment in a laboratory experiment. Subjects are faced with a tedious productivity task and a tempting option to surf the internet. Subjects state their willingness-to-pay for a commitment device that removes the option to surf. The commitment device is then allocated with some probability, thus allowing us to observe the behavior of subjects who demand commitment but have to face temptation. We find that a significant share of the subjects overestimate their demand for commitment when compared to their material loss from facing the temptation. This is true even when we take into account the potential desire to avoid psychological costs from being tempted. Assuming risk aversion does not change our conclusion, though it suggests that pessimism in expected performance, rather than psychological cost, is the main driver of overcommitment. Our results suggest there is a need to reconsider the active promotion of commitment devices in situations where there is limited disutility from the tempting option. |
| Keywords: | Commitment device; Pessimism; Self-control |
| JEL: | C91 D03 D91 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:ucn:wpaper:201921&r=all |
| By: | Riza Demirer (Department of Economics and Finance, Southern Illinois University Edwardsville, Edwardsville, IL 62026-1102, USA); Konstantinos Gkillas (Department of Business Administration, University of Patras – University Campus, Rio, P.O. Box 1391, 26500 Patras, Greece); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa); Christian Pierdzioch (Department of Economics, Helmut Schmidt University, Holstenhofweg 85, P.O.B. 700822, 22008 Hamburg, Germany) |
| Abstract: | We analyze the predictive power of time-varying risk aversion for the realized volatility of crude oil returns based on high-frequency data. While the popular linear heterogeneous autoregressive realized volatility (HAR-RV) model fails to recognize the predictive power of risk aversion over crude oil volatility, we find that risk aversion indeed improves forecast accuracy at all forecast horizons when we compute forecasts by means of random forests. The predictive power of risk aversion is robust to various covariates including realized skewness and realized kurtosis, various measures of jump intensity and leverage. The findings highlight the importance of accounting for nonlinearity in the data-generating process for forecast accuracy as well as the predictive power of non-cashflow factors over commodity-market uncertainty with significant implications for the pricing and forecasting in these markets. |
| Keywords: | Oil price, Realized volatility, Risk aversion, Random forests |
| JEL: | G17 Q02 Q47 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201972&r=all |
| By: | Stefan Nagel; Zhengyang Xu |
| Abstract: | Building on evidence that lifetime experiences shape individuals' macroeconomic expectations, we study asset prices in an economy in which a representative agent learns with fading memory about unconditional mean endowment growth. With IID fundamentals, constant risk aversion, and memory decay calibrated to microdata, the model generates a high and strongly counter-cyclical objective equity premium, while the subjective equity premium is virtually constant. Consistent with this theory, experienced payout growth (a weighted average of past growth rates) is negatively related to future stock market excess returns and subjective expectations errors in surveys, and positively to analyst forecasts of long-run earnings growth. |
| JEL: | G12 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26255&r=all |
| By: | Patrick Hirsch |
| Abstract: | The euro area economies are bound together by monetary policy while still inhibiting many heterogeneities. Amongst them the share of homeowners. This paper presents a medium-scale New Keynesian DSGE model of the euro area with an extensive housing market which explicitly models endogenous tenure choice. Results from the calibrated model indicate that there are various parameters determining the ownership rate. Dependent on the drivers of the heterogeneity, shocks have substantial effects on real variables when homeownership rates differ across countries. |
| Keywords: | Facility Management; indoor environment; Market value of buildings; Smart buildings; Utility value of buildings |
| JEL: | R3 |
| Date: | 2019–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:arz:wpaper:eres2019_369&r=all |
| By: | Minseong Kim |
| Abstract: | We demonstrate that if all agents in an economy make time-consistent decisions and policies, then there exists no rational expectation equilibrium in a dynamic stochastic general equilibrium (DSGE) model, unless under very restrictive and special circumstances. Some time-consistent interest rate rules, such as Taylor rule, worsen the equilibrium non-existence issue in general circumstances. Monetary policy needs to be lagged in order to avoid equilibrium non-existence due to agents making time-consistent decisions. We also show that due to the transversality condition issue, either fiscal-monetary coordination may need to be modeled, or it may be necessary to write a model such that bonds or money provides utility as medium of exchange or has liquidity roles. |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1909.10915&r=all |
| By: | John Armstrong; Cristin Buescu |
| Abstract: | We study the optimal management of a collectivised pension fund, where all investors agree that the assets of deceased members are shared among the survivors. We find that for realistic parameters based on the UK pensions market, a collectivised fund achieves an approximately 20% better return than either an annuity or a personal investment fund. We introduce models of investor preferences over a stream of pension payments in the presence of mortality, incorporating a new concept of adequacy. We find that for risk-averse individuals, pension adequacy plays an important role in determining the optimal fund management strategy. A key issue in the design of collective funds is how to ensure the fund treats all investors fairly. This is a trivial problem in the case that all investors have identical preferences, wealth and mortality, but becomes challenging for heterogeneous funds. We give a strategy for the management of heterogeneous funds in complete markets and prove that it is asymptotically optimal in the absence of systematic longevity risk. |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1909.12730&r=all |
| By: | Moshe Babaioff; Uriel Feige |
| Abstract: | We consider transferable-utility profit-sharing games that arise from settings in which agents need to jointly choose one of several alternatives, and may use transfers to redistribute the welfare generated by the chosen alternative. One such setting is the Shared-Rental problem, in which students jointly rent an apartment and need to decide which bedroom to allocate to each student, depending on the student's preferences. Many solution concepts have been proposed for such settings, ranging from mechanisms without transfers, such as Random Priority and the Eating mechanism, to mechanisms with transfers, such as envy free solutions, the Shapley value, and the Kalai-Smorodinsky bargaining solution. We seek a solution concept that satisfies three natural properties, concerning efficiency, fairness and decomposition. We observe that every solution concept known (to us) fails to satisfy at least one of the three properties. We present a new solution concept, designed so as to satisfy the three properties. A certain submodularity condition (which holds in interesting special cases such as the Shared-Rental setting) implies both existence and uniqueness of our solution concept. |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1909.11346&r=all |
| By: | Fatih Guvenen; Gueorgui Kambourov; Burhan Kuruscu; Sergio Ocampo; Daphne Chen |
| Abstract: | How does wealth taxation differ from capital income taxation? When the return on investment is equal across individuals, a well-known result is that the two tax systems are equivalent. Motivated by recent empirical evidence documenting persistent heterogeneity in rates of return across individuals, we revisit this question. With such heterogeneity, the two tax systems have opposite implications for both efficiency and inequality. Under capital income taxation, entrepreneurs who are more productive, and therefore generate more income, pay higher taxes. Under wealth taxation, entrepreneurs who have similar wealth levels pay similar taxes regardless of their productivity, which expands the tax base, shifts the tax burden toward unproductive entrepreneurs, and raises the savings rate of productive ones. This reallocation increases aggregate productivity and output. In the simulated model parameterized to match the US data, replacing the capital income tax with a wealth tax in a revenue-neutral fashion delivers a significantly higher average lifetime utility to a newborn (about 7.5% in consumption-equivalent terms). Turning to optimal taxation, the optimal wealth tax (OWT) in a stationary equilibrium is positive and yields even larger welfare gains. In contrast, the optimal capital income tax (OCIT) is negative—a subsidy—and large, and it delivers lower welfare gains than the wealth tax. Furthermore, the subsidy policy increases consumption inequality, whereas the wealth tax reduces it slightly. We also consider an extension that models the transition path and find that individuals who are alive at the time of the policy change, on average, would incur large welfare losses if the new policy is OCIT but would experience large welfare gains if the new policy is an OWT. We conclude that wealth taxation has the potential to raise productivity while simultaneously reducing consumption inequality. |
| Keywords: | Wealth taxation, Capital income tax, Rate of return heterogeneity, Power law models, Wealth inequality |
| JEL: | E21 E22 E62 H21 |
| Date: | 2019–09–25 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-648&r=all |
| By: | Erwin Bulte; John A. List; Daan Van Soest |
| Abstract: | Social scientists have recently explored how framing of gains and losses affects productivity. We conducted a field experiment in peri-urban Uganda, and compare output levels across 1000 workers over isomorphic tasks and incentives, framed as either losses or gains. We find that loss aversion can be leveraged to increase the productivity of labor. The estimated welfare costs of using the loss contract are quite modest – perhaps because the loss contract is viewed as a (soft) commitment device. |
| JEL: | C93 D03 J01 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26286&r=all |
| By: | Majid M. Al-Sadoon; Piotr Zwiernik |
| Abstract: | We consider the problem of the identification of stationary solutions to linear rational expectations models from the second moments of observable data. Observational equivalence is characterized and necessary and sufficient conditions are provided for: (i) identification under affine restrictions, (ii) generic identification under affine restrictions of analytically parametrized models, and (iii) local identification under non-linear restrictions. The results strongly resemble the classical theory for VARMA models although significant points of departure are also documented. |
| Keywords: | identification, linear rational expectations models, linear systems, vector autoregressive moving average models |
| JEL: | C10 C22 C32 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1114&r=all |
| By: | Anastasis Kratsios |
| Abstract: | This paper introduces an intermediary between conditional expectation and conditional sublinear expectation, called R-conditioning. The R-conditioning of a random-vector in $L^2$ is defined as the best $L^2$-estimate, given a $\sigma$-subalgebra and a degree of model uncertainty. When the random vector represents the payoff of derivative security in a complete financial market, its R-conditioning with respect to the risk-neutral measure is interpreted as its risk-averse value. The optimization problem defining the optimization R-conditioning is shown to be well-posed. We show that the R-conditioning operators can be used to approximate a large class of sublinear expectations to arbitrary precision. We then introduce a novel numerical algorithm for computing the R-conditioning. This algorithm is shown to be strongly convergent. Implementations are used to compare the risk-averse value of a Vanilla option to its traditional risk-neutral value, within the Black-Scholes-Merton framework. Concrete connections to robust finance, sensitivity analysis, and high-dimensional estimation are all treated in this paper. |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1909.13610&r=all |
| By: | Rohan Kekre (University of Chicago); Moritz Lenel (Princeton University) |
| Abstract: | We explore the effects of monetary, fiscal, and macroprudential policies on risk premia and investment in a heterogeneous agent New Keynesian environment. Heterogeneity in agents' marginal propensity to save in capital (MPSK) summarizes differences in risk aversion, portfolio constraints, and background risk. Policies which redistribute to agents with high MPSKs reduce risk premia and, absent a monetary policy tightening, raise investment. We quantitatively evaluate the role of this mechanism for the transmission of conventional monetary policy. An unexpected reduction in the nominal interest rate redistributes to agents with high MPSKs. We characterize the necessary heterogeneity in MPSKs to rationalize the observed stock market and investment responses to monetary policy shocks. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1423&r=all |
| By: | Paul Ryan; Clare Branigan |
| Abstract: | This paper investigates the impact of valuation uncertainty on residential property prices near the peak of a bubble. Our hand-collected sample comprises the sequence of bids and gender of the participating bidders at Irish residential real estate auctions, prior to the collapse of a bubble, which when it burst had disastrous implications for the banking system and the economy itself. Portfolios of practitioner- and hedonic pricing model-selected self-similar properties provide benchmark property price estimates and uncertainty is calculated by reference to various measures of dispersion related to prices achieved for comparable properties. We find, in aggregate, auction winners do not shade bids with increased valuation uncertainty. In addition, winning female bidders, in contrast to findings in the extant literature across a wide range of academic disciplines, including experimental bubble markets, are not less risk averse, or more likely to shy away from competitive situations than their male counterparts. |
| Keywords: | Auctions; Bubble; Competition; emotional finance; Emotions; female bidders; real estate bubble; Uncertainty; valuation uncertainty |
| JEL: | R3 |
| Date: | 2019–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:arz:wpaper:eres2019_167&r=all |
| By: | Jussila Hammes, Johanna (Swedish National Road & Transport Research Institute (VTI)); Nerhagen, Lena (Dalarna University); Congdon Fors, Heather (University of Gothenburg) |
| Abstract: | Social scientists regularly criticize the use of cost-benefit analysis (CBA), which has led to much focus being placed on investigating the possible biases related to its results. Recent research shows that CBA is not routinely done prior to environmental, energy, and climate policymaking in Sweden, and in countries where a CBA is made, the results have little influence on political decisions. This paper investigates obstacles to using CBA information with a focus on bureaucrats. We use empirical data from Sweden, where the ministries are small by international standards and hence government agencies have a sizeable influence on policymaking. We construct a theoretical model and then test the theoretical predictions with empirical data collected from five Swedish government agencies. The empirical results lend support both for the assertion that risk aversion concerning the environmental outcome, the bureaucrats’ environmental attitudes, and the cost of taking CBA information into account have a considerable impact on the probability of using information from a CBA. Hence risk averse and bureaucrats with strong environmental preferences are less likely and bureaucrats with low cost of doing a CBA more likely than other bureaucrats to use CBA information. Finally, a binding governmental budget constraint may positively influence a bureaucrat’s choice of undertaking a CBA. A tentative conclusion is therefore that it may be possible to increase the use of CBA by making the budgetary consequences of policies much clearer and demanding due consideration of costs. |
| Keywords: | Bureaucrats; Cost-Benefit Analysis; Delegation; Environmental Policy; Environmental Preferences; Risk Aversion/Neutral/Loving |
| JEL: | D61 D73 H41 |
| Date: | 2019–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:vtiwps:2019_006&r=all |
| By: | Sarah Parlane; L. (Lisa B.) Ryan |
| Abstract: | Companies are increasingly choosing to procure their power from renewable energy sources, with their own set of potential challenges. In this paper we focus on contracts to procure electricity from renewable sources that are inherently unreliable (such as wind and solar). We determine the contracts that minimize the cost of procuring a given amount of renewable energy from two risk-averse generators. We contrast outcomes arising when investments are set in centralised and decentralised settings, with the absence of reliability addressed by either issuing orders in excess of what is needed or by investing in improved reliability. Our results suggest that future contracts may be geared towards a greater reliance on order inflation and lower investments in reliability as the cost of renewable energy keeps falling. The implications of these results for grid congestion and electricity spot market prices should be of interest to regulators and transmission system operators. |
| Keywords: | Renewable electricity contracts; Power purchase agreements; Newsvendor model; Risk aversion; Order inflation; Moral hazard |
| JEL: | D81 D86 L14 L24 L94 Q21 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:ucn:wpaper:201920&r=all |