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on Utility Models and Prospect Theory |
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Issue of 2020‒03‒16
sixteen papers chosen by |
| By: | Camille Tevenart; Marielle Brunette |
| Abstract: | In a context of climate change, the agricultural sector offers a potential of mitigation. However, most of the farmers do not adopt the mitigation practices recommended, among them the reduction of nitrogen fertilization. In parallel, various uncertainties characterize agricultural production, so that farmer's risk and ambiguity preferences may be potential determinants to the adoption (or not) of mitigation practices. This is precisely the objective of this paper to explore this way. For that purpose, we realize a questionnaire submitted to French farmers where we elicit risk and ambiguity preferences through simple lottery choices, and then we ask questions about the farmer's fertilization decisions. We show that risk aversion as well as ambiguity aversion impact fertilization practices, through diverse drivers and in an opposite direction. This result implies that fertilization practices are more complex than only classic risk-related behaviors. The incentive approaches associated with mitigation and fertilization have to take into account this complexity. |
| Keywords: | Risk Uncertainty, Ambiguity, Agriculture, Fertilization, Mitigation |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:cec:wpaper:1903&r=all |
| By: | Joshua Aurand; Yu-Jui Huang |
| Abstract: | This paper investigates optimal consumption, investment, and healthcare spending under Epstein-Zin preferences. Given consumption and healthcare spending plans, Epstein-Zin utilities are defined over an agent's random lifetime, partially controllable by the agent as healthcare reduces Gompertz' natural growth rate of mortality. In a Black-Scholes market, the stochastic optimization problem is solved through the associated Hamilton-Jacobi-Bellman (HJB) equation. Compared with classical Epstein-Zin utility maximization, the additional controlled mortality process complicates the uniqueness of Epstein-Zin utilities and verification arguments. A combination of probabilistic arguments and analysis of the HJB equation are required to resolve the challenges. In contrast to prior work under time-separable utilities, Epstein-Zin preferences largely facilitate calibration. In five different countries we examined, the model-generated mortality closely approximates actual mortality data; moreover, the calibrated efficacy of healthcare is in close agreement with empirical studies on healthcare across countries. |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2003.01783&r=all |
| By: | Kohei Daido (School of Economics, Kwansei Gakuin University); Tomoya Tajika (Department of Law and Economics, Hokusei Gakuen University) |
| Abstract: | This paper builds a two-candidate election model, in which voters are loss averse and face uncertainty about whether their preferred candidate is supported by a majority. Even without costs for voting, abstention may occur when voters have expectations-based reference-dependent preferences, as in KÅ‘szegi and Rabin (2006, 2007). The model shows that loss aversion leads to the equilibrium in which abstention is more likely as an election becomes more competitive and the abstention rate of voters who prefer a minority candidate is higher than for those who prefer a majority candidate. |
| Keywords: | Abstention, Expectations-Based Reference-Dependent Preferences, Loss Aversion, Voting |
| JEL: | D72 D91 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:kgu:wpaper:205&r=all |
| By: | Takeshi Murooka (Osaka School of International Public Policy, Osaka University); Takuro Yamashita (Toulouse School of Economics, University of Toulouse) |
| Abstract: | There is accumulating evidence that some consumers are behavioral in the sense that they may make suboptimal decisions. This paper investigates adverse selection with general types of such behavioral biases. In our model, some buyers (i.e., consumers) may take actions that do not necessary optimize own payoffs, which encompass virtually any type of biases including subjective probability,framing, model misspecification, random errors, and inferential naivety. We focus on a situation in which there exists severe adverse selection where only no-trade outcome is possible under rational agents. We show that the no-trade theorem remains to hold without imposing any additional assumption on buyers' behavior. That is, if there is any trade under a mechanism which is incentive compatible for sellers, then the expected payoff from the trade is negative (i.e., ex ante individual rationality constraint is violated) for some type of buyers. Our result sheds light on a new trade-off between social surplus and payoff losses of boundedly-rational buyers. |
| Keywords: | adverse selection, bounded rationality, mechanism design, no-trade theorem |
| JEL: | D82 D83 D86 D90 D91 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:osp:wpaper:20e002&r=all |
| By: | Brian Hill (HEC Paris - Recherche - Hors Laboratoire - HEC Paris - Ecole des Hautes Etudes Commerciales, CNRS - Centre National de la Recherche Scientifique, GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | The famous conflict between dynamic consistency and ambiguity purportedly undermines these models' normative credibility, and challenges their use in economic applications. Dynamic consistency concerns preferences over contingent plans: so what counts are the contingencies the decision maker envisages-and plans for-rather than independently fixed contingencies , as implicitly assumed in standard formalisations. An appropriate formulation of dynamic consistency resolves the aforementioned conflict, hence undermining the criticisms of ambiguity models based on it. Moreover, it provides a principled justification for the restriction to certain families of beliefs in applications of these models in dynamic choice problems. Finally, it supports a new analysis of the value of information under ambiguity, showing that decision makers may only turn down information if it has an opportunity cost, in terms of the compromising of information they had otherwise expected to receive. |
| Keywords: | Dynamic Consistency,Ambiguity,Value of Information,Envisaged Contingency,Decision under Uncertainty,Dynamic Choice |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-02457455&r=all |
| By: | Tanaka, Yasuhito |
| Abstract: | We show the existence of involuntary unemployment without assuming wage rigidity. We derive involuntary unemployment by considering utility maximization of consumers and profit maximization of firms in an overlapping generations model under perfect competition with constant returns to scale technology. We show that there exists involuntary unemployment in a case where labor supply is indivisible. We also show that reduction of nominal wages can not rescue involuntary unemployment. |
| Keywords: | 非自発的失業，完全競争，非分割的労働供給，世代重複モデル |
| JEL: | E12 E24 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:98904&r=all |
| By: | Amit K Chattopadhyay; Biswajit Debnath; Rihab El-Hassani; Sadhan Kumar Ghosh; Rahul Baidya |
| Abstract: | The importance of supply chain management in analyzing and later catalyzing economic expectations while simultaneously prioritizing cleaner production aspects is a vital component of modern finance. Such predictions, though, are often known to be less than accurate due to the ubiquitous uncertainty plaguing most business decisions. Starting from a multi-dimensional cost function defining the sustainability of the supply chain (SC) kernel, this article outlines a 4-component SC module - environmental, demand, economic, and social uncertainties - each ranked according to its individual weight. Our mathematical model then assesses the viability of a sustainable business by first ranking the potentially stochastic variables in order of their subjective importance, and then optimizing the cost kernel, defined from a utility function. The model will then identify conditions (as equations) validating the sustainability of a business venture. The ranking is initially obtained from an Analytical Hierarchical Process; the resultant weighted cost function is then optimized to analyze the impact of market uncertainty based on our supply chain model. Model predictions are then ratified against SME data to emphasize the importance of cleaner production in business strategies. |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2003.00884&r=all |
| By: | Dietzenbacher, Bas (Tilburg University, Center For Economic Research); Yanovskaya, E. |
| Abstract: | This note shows that the egalitarian Dutta and Ray (1989) solution for transferable utility games is self-antidual on the class of exact partition games. By applying a careful antiduality analysis, we derive several new axiomatic characterizations. Moreover, we point out an error in earlier work on antiduality and repair and strengthen several related characterizations on the class of convex games. |
| Keywords: | transferable utility games; egalitarianism; antiduality; exact partition games; Convex games |
| JEL: | C71 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiucen:0b8133f8-cab7-46ae-8881-03cb32f26843&r=all |
| By: | Tanaka, Yasuhito |
| Abstract: | We show the existence of involuntary unemployment without assuming wage rigidity. We derive involuntary unemployment by considering utility maximization of consumers and profit maximization of firms in an overlapping generations model under perfect competition with constant returns to scale technology. We show that there exists involuntary unemployment even when labor supply is divisible. We also show that reduction of nominal wages can not rescue involuntary unemployment. |
| Keywords: | 非自発的失業，完全競争，分割的労働供給，世代重複モデル |
| JEL: | E12 E24 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:98905&r=all |
| By: | Andras Molnar; Shereen J. Chaudhry; George Loewenstein |
| Abstract: | We examine whether belief-based preferences - caring about what transgressors believe - play a crucial role in punishment decisions: Do punishers want to make sure that transgressors understand why they are being punished, and is this desire to affect beliefs often prioritized over distributive and retributive preferences? We test whether punishers derive utility from three distinct sources: material outcomes (their own and the transgressor’s payoff), affective states (the transgressor’s suffering), and cognitive states (the transgressor’s beliefs about the cause of that suffering). In a novel, preregistered experiment (N = 1,959) we demonstrate that consideration for transgressors’ beliefs affects punishment decisions on its own, regardless of the considerations for material outcomes (distributional preferences) and affective states (retributive preferences). By contrast, we find very little evidence for pure retributive preferences (i.e., to merely inflict suffering on transgressors). We also show that people who would otherwise enact harsh punishments, are willing to punish less severely, if by doing so they can tell the transgressor why they are punishing them. Finally, we demonstrate that the preference for affecting transgressors’ beliefs cannot be explained by deterrence motives (i.e., to make transgressors behave better in the future). |
| Keywords: | beliefs, belief-based utility, justice, fairness, morality, punishment, revenge |
| JEL: | C91 D63 D82 D83 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8102&r=all |
| By: | Gary E. Bolton; Eugen Dimant; Ulrich Schmidt |
| Abstract: | Both theory and recent empirical evidence on nudging suggest that observability of behavior acts as an instrument for promoting (discouraging) pro-social (anti-social) behavior. We connect three streams of literature (nudging, social preferences, and social norms) to investigate the universality of these claims. By employing a series of high-powered laboratory and online studies, we report here on an investigation of the questions of when and in what form backfiring occurs, the mechanism behind the backfiring, and how to mitigate it. We find that inequality aversion moderates the effectiveness of such nudges and that increasing the focus on social norms can counteract the backfiring effects of such behavioral interventions. Our results are informative for those who work on nudging and behavioral change, including scholars, company officials, and policy-makers. |
| Keywords: | anti-social behavior, nudge, pro-social behavior, reputation, social norms |
| JEL: | C91 D64 D90 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8070&r=all |
| By: | Michael Pinelis; David Ruppert |
| Abstract: | We find economically and statistically significant gains from using machine learning to dynamically allocate between the market index and the risk-free asset. We model the market price of risk to determine the optimal weights in the portfolio: reward-risk market timing. This involves forecasting the direction of next month's excess return, which gives the reward, and constructing a dynamic volatility estimator that is optimized with a machine learning model, which gives the risk. Reward-risk timing with machine learning provides substantial improvements in investor utility, alphas, Sharpe ratios, and maximum drawdowns, after accounting for transaction costs, leverage constraints, and on a new out-of-sample test set. This paper provides a unifying framework for machine learning applied to both return- and volatility-timing. |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2003.00656&r=all |
| By: | Late Lawson (BETA, CNRS, INRAE & University of Strasbourg); Lawson Late |
| Abstract: | This paper assesses the interactions between human societies and nature, arguing that population growth and forest resources harvest cause natural habitat conversion, which resolves into biodiversity loss. Relying on profit and utility maximization behaviours, we describe the joint evolution of population, forest and species stock by a dynamic system characterized by a locally stable steady state. Compared to existing studies, we enlighten the possibility of total extinction of biological species (empty forests). Furthermore, our analysis supports an impossible peaceful cohabitation, as in presence of human population growth, forest resources and species stock diverge from their carrying capacity. Finally, scenarios analyses associated with high fertility and preference for the resource-based good globally indicate rapid population growth followed by a sudden drop. |
| Keywords: | Economic growth, Population, Forest clearing, Habitat destruction, Species loss |
| JEL: | Q32 Q57 R11 |
| URL: | http://d.repec.org/n?u=RePEc:fae:wpaper:2020.08&r=all |
| By: | Djanibekov, Utkur; Khamizina, Asia; Villamor, Grace; Lamers, John |
| Abstract: | Irrigated agricultural production in Uzbekistan is threatened by the impacts of land degradation, irrigation water scarcity and climate change. The conversion of marginal croplands to tree plantations is an option for rehabilitation of nutrient-depleted cropland soils, saving of irrigation water, carbon sequestration, and improving population welfare. The economic benefits and impacts of tree planting on marginal croplands, and policies that may facilitate the adoption of this land use are not well known. We employed various methods at different scales to investigate economically viable options of afforestation on marginal croplands on example of irrigated drylands of Uzbekistan. This includes analyzing the impacts of afforestation supported by the carbon (C) sequestration reward on the rural livelihoods. At field level (one hectare), the stochastic dominance analysis was employed to investigate the financial attractiveness of afforestation on marginal farmlands under uncertainty. At the farm level, the expected utility method was employed to analyze effects of this land use change on farm incomes. To consider the bimodal structure of agriculture in Uzbekistan, the stochastic dynamic farm-household model was developed. The results indicate that due to benefits from non-timber products, afforestation is a more viable land use option on marginal lands than crop cultivation. Allowing the exemption of marginal lands from cotton cropping in favor of tree planting would incentivize afforestation. At the same time, the field level analysis indicates that due to variability in returns a substantial increase in C prices would make afforestation as financially attractive as crops on marginal lands. However, when considering uncertainties in land use returns at the whole farm level, afforestation would occur without the C incentives due to improved irrigation water use efficiency and reduced revenue risks through land use diversification. Through the considered farm-household wage-labor relationship, the benefits of afforestation on marginal croplands at farm would be also transferred to rural smallholders employed at this farm. This would mainly result from improved payment structure by tree products, particularly fuelwood and foliage for livestock fodder. |
| Keywords: | International Development, Land Economics/Use, Research Methods/ Statistical Methods |
| URL: | http://d.repec.org/n?u=RePEc:ags:ugidic:302378&r=all |
| By: | Samuel Monteiro (I&P - Investisseurs et Partenaires) |
| Abstract: | Using a unique database of 204 employees in Senegal, this paper seeks to understand the determinants leading to the choice to enroll (or not) in a health insurance plan. To answer this question, we created three surveys to test certain preferences (time preference and risk aversion) and the role of information. In this paper, we show that Senegalese employees have a very strong preference for the present and a low aversion to loss, which could cause them to not take out insurance. We find that access to information on health insurance plays an essential role in the willingness to enroll. While 12% of employees who received no information about health insurance said they would not want to be insured if they could choose, this proportion dropped to 2% among employees who received positive information about health insurance. These results are econometrically confirmed when controlling for other factors such as gender, age and education. These results show the importance of information on people's perception of health insurance. It is therefore essential to communicate on the functioning of health insurance and the benefits of being covered in order to strengthen adherence to a health insurance system. |
| Keywords: | Health insurance,Risk aversion,Time preferences,Information,Africa |
| Date: | 2019–12–30 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-02493397&r=all |
| By: | Yongyang Cai |
| Abstract: | Integrated Assessment Models (IAMs) of the climate and economy aim to analyze the impact and efficacy of policies that aim to control climate change, such as carbon taxes and subsidies. A major characteristic of IAMs is that their geophysical sector determines the mean surface temperature increase over the preindustrial level, which in turn determines the damage function. Most of the existing IAMs are perfect-foresight forward-looking models, assuming that we know all of the future information. However, there are significant uncertainties in the climate and economic system, including parameter uncertainty, model uncertainty, climate tipping risks, economic risks, and ambiguity. For example, climate damages are uncertain: some researchers assume that climate damages are proportional to instantaneous output, while others assume that climate damages have a more persistent impact on economic growth. Climate tipping risks represent (nearly) irreversible climate events that may lead to significant changes in the climate system, such as the Greenland ice sheet collapse, while the conditions, probability of tipping, duration, and associated damage are also uncertain. Technological progress in carbon capture and storage, adaptation, renewable energy, and energy efficiency are uncertain too. In the face of these uncertainties, policymakers have to provide a decision that considers important factors such as risk aversion, inequality aversion, and sustainability of the economy and ecosystem. Solving this problem may require richer and more realistic models than standard IAMs, and advanced computational methods. The recent literature has shown that these uncertainties can be incorporated into IAMs and may change optimal climate policies significantly. |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2003.01615&r=all |