nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2020‒03‒23
fourteen papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Experimental tests of the endowment effect and the Coase theorem By John List
  2. Human capital and welfare Human capital and welfare By Stefano Bosi; Carmen Camacho; David Desmarchelier
  3. An AGI Modifying Its Utility Function in Violation of the Orthogonality Thesis By James D. Miller; Roman Yampolskiy; Olle H\"aggstr\"om
  4. The Role of Heterogeneous Risk Preferences, Discount Rates, and Earnings Expectations in College Major Choice By Arpita Patnaik; Joanna Venator; Matthew Wiswall; Basit Zafar
  5. Convex duality for Epstein-Zin stochastic differential utility By Matoussi, Anis; Xing, Hao
  6. Rational choice hypothesis as X-point of utility function and norm function By Takeshi Kato; Yasuyuki Kudo; Junichi Miyakoshi; Jun Otsuka; Hayato Saigo; Kaori Karasawa; Hiroyuki Yamaguchi; Yasuo Deguchi
  7. How to Measure the Average Rate of Change? By Aleksandr Alekseev; Mikhail Sokolov
  8. Identification of Random Coefficient Latent Utility Models By Roy Allen; John Rehbeck
  9. How to Avoid Household Debt Overhang? An Analytical Framework and Analysis for India By Yoshino, Naoyuki; Gupta, Prachi
  10. Do grassroots interventions relax behavioral constraints to the adoption of nutrition-sensitive food production systems?: By Alvi, Muzna; Ward, Patrick S.; Makhija, Simrin; Spielman, David J.
  11. Towards Sustainable Energy Consumption Electricity Demand Flexibility and Household Fuel Choice By Daniel, Aemiro Melkamu
  12. The Classical Theory of Supply and Demand By Sabiou M. Inoua; Vernon L. Smith
  13. Optimization of High-Speed Railway Station Location Selection Based on Accessibility and Environmental Impact By Roy, Sandeepan; Maji, Avijit
  14. Sustainability and fairness simulations based on decision-making model of utility function and norm function By Takeshi Kato; Yasuyuki Kudo; Junichi Miyakoshi; Jun Otsuka; Hayato Saigo; Kaori Karasawa; Hiroyuki Yamaguchi; Yoshinori Hiroi; Yasuo Deguchi

  1. By: John List
    Abstract: This review summarizes the historical place of the seminal contribution of Kahneman et al. (1990), from origins to theory to catalyst of an entire area of scholarship. This new literature has produced evidence both in concert with the original KKT conclusions as well as evidence refuting certain insights from KKT. The general theme of my summary is that even imperfect papers can have deep impact, both within and outside the academy; a lesson that today's critics should consider as young experimentalists continue to fight the tyranny of the top 5.
    Date: 2020
  2. By: Stefano Bosi (EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne); Carmen Camacho (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PSE - Paris School of Economics); David Desmarchelier (BETA - Bureau d'Économie Théorique et Appliquée - INRA - Institut National de la Recherche Agronomique - UNISTRA - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We consider a growth model à la Lucas (1988), where human capital has an additional positive effect on social welfare through the quality of individual health and education. Considering a simple example with isoe-lastic technology and preferences, we show that, differently from Lucas' contribution, the BGP is optimal only in the specific case in which consumption and human capital have equal weight in total utility. In general, the BGP fails to be optimal. Indeed, when the weight of consumption exceeds that of human capital, the household chooses to spend all her time working from a critical date on. As a result, if individuals do not appreciate enough human capital, then they fix a ceiling level of human capital. On the contrary, the working time decreases to zero when the weight of human capital exceeds that of consumption. On methodologi-cal ground, very interestingly, we obtain a strictly positive transversality condition. Furthermore, we compute the explicit optimal trajectories for human capital, labor supply and consumption demand.
    Keywords: human capital,unbalanced growth,transversality condition Keywords: human capital,transversality condi- tion
    Date: 2020–01
  3. By: James D. Miller; Roman Yampolskiy; Olle H\"aggstr\"om
    Abstract: An artificial general intelligence (AGI) might have an instrumental drive to modify its utility function to improve its ability to cooperate, bargain, promise, threaten, and resist and engage in blackmail. Such an AGI would necessarily have a utility function that was at least partially observable and that was influenced by how other agents chose to interact with it. This instrumental drive would conflict with the orthogonality thesis since the modifications would be influenced by the AGI's intelligence. AGIs in highly competitive environments might converge to having nearly the same utility function, one optimized to favorably influencing other agents through game theory.
    Date: 2020–01
  4. By: Arpita Patnaik; Joanna Venator; Matthew Wiswall; Basit Zafar
    Abstract: In this paper, we estimate a rich model of college major choice using a panel of experimentally-derived data. Our estimation strategy combines two types of data: data on self-reported beliefs about future earnings from potential human capital decisions and survey-based measures of risk and time preferences. We show how to use these data to identify a general life-cycle model, allowing for rich patterns of heterogeneous beliefs and preferences. Our data allow us to separate perceptions about the degree of risk or perceptions about the current versus future payoffs for a choice from the individual's preference for risk and patience. Comparing our estimates of the general model to estimates of models which ignore heterogeneity in risk and time preferences, we find that these restricted models are likely to overstate the importance of earnings to major choice. Additionally, we show that while men are less risk averse and patient than women, gender differences in expectations about own-earnings, risk aversion, and patience cannot explain gender gaps in major choice.
    JEL: I23 J16 J24
    Date: 2020–02
  5. By: Matoussi, Anis; Xing, Hao
    Abstract: This paper introduces a dual problem to study a continuous-time consumption and investment problem with incomplete markets and Epstein-Zin stochastic differential utilities. Duality between the primal and dual problems is established. Consequently, the optimal strategy of this consumption and investment problem is identified without assuming several technical conditions on market models, utility specifications, and agent’s admissible strategies. Meanwhile, the minimizer of the dual problem is identified as the utility gradient of the primal value and is economically interpreted as the “least favorable" completion of the market
    JEL: F3 G3
    Date: 2018–10–01
  6. By: Takeshi Kato; Yasuyuki Kudo; Junichi Miyakoshi; Jun Otsuka; Hayato Saigo; Kaori Karasawa; Hiroyuki Yamaguchi; Yasuo Deguchi
    Abstract: Towards the realization of a sustainable, fair and inclusive society, we propose a novel decision-making model that incorporates social norms in a rational choice model from the standpoints of deontology and utilitarianism, and make a hypothesis that interprets choice of action as the X-point for individual utility function increasing with actions and social norm function decreasing with actions. This hypothesis is based on humans balancing the value of utility and the value of norms psychologically in choosing actions. Using the hypothesis and approximation, we were able to isolate and infer utility function and norm function from real-world measurement data of actions on environmental conditions, and elucidate the interaction between the both functions to lead actions from current to target. As examples of collective data that aggregate decision-making of individuals, we looked at the changes in power usage before and after the Great East Japan Earthquake and the correlation between national GDP and CO2 emission in different countries. The first example is interpreted that the benefits for power (i.e., utility of power usage) is stronger than the power usage restrictions imposed by norms after the earthquake, contrary to our expectation. The second example is interpreted that the reduction of CO2 emission in each country is not related to utility derived from GDP but to norms related to CO2 emission. Going forward, we will apply this new X-point model to actual social practices involving normative problems, and design the approaches for the diagnosis, prognosis, and intervention of social systems (individual action, inter-individual interaction, and institution) by IT systems.
    Date: 2020–02
  7. By: Aleksandr Alekseev; Mikhail Sokolov
    Abstract: This paper contributes to the theory of average rate of change (ARC) measurement. The contribution is twofold. First, it relates ARC measurement to intertemporal choice. We show that an ARC of a variable can be identified with a discount rate which makes an economic agent indifferent between the initial and final temporal states of the variable. Furthermore, there is a one-to-one correspondence between ARC measures and one-parameter families of time preferences indexed by a discount rate. Second, we employ an axiomatic approach to generalize the conventional ARC measures (such as the difference quotient and the continuously compounded growth rate) in several directions: to variables with arbitrary connected domains, to not necessarily time-shift invariant dependence on dates, to sets of time points other than an interval, to a benchmark-based evaluation. The generalized ARC measures turn out to correspond to the existing time preference models such as the discounted utility and the relative discounting model of Ok and Masatlioglu [Ok, E. A., Masatlioglu, Y., 2007. A theory of (relative) discounting. J. Econ. Theory 137 (1), 214Ð245]
    Keywords: average rate of change, time preference, discounting, difference representation
    JEL: C43 D11 D91
    Date: 2020–02–15
  8. By: Roy Allen; John Rehbeck
    Abstract: This paper provides nonparametric identification results for random coefficient distributions in perturbed utility models. We cover discrete and continuous choice models. We establish identification using variation in mean quantities, and the results apply when an analyst observes aggregate demands but not whether goods are chosen together. We require exclusion restrictions and independence between random slope coefficients and random intercepts. We do not require regressors to have large supports or parametric assumptions.
    Date: 2020–02
  9. By: Yoshino, Naoyuki (Asian Development Bank Institute); Gupta, Prachi (Asian Development Bank Institute)
    Abstract: We develop an analytical framework using the household utility maximization approach to model stability conditions to avoid household debt overhang. Our theoretical framework suggests that household debt stability is a function of five factors, namely the rate of interest, period of lending, income growth, loan-to-income ratio, and households’ disutility from borrowing parameter. Further, we apply our analytical model to the case of India and estimate household debt stability conditions for Indian households under various scenarios to estimate the ceiling borrowing ratios borrowing below which households can avoid the risk of running into a debt overhang problem.
    Keywords: debt overhang; household finance; household borrowing
    JEL: C13 C15 C62 D10 H31
    Date: 2019–07–08
  10. By: Alvi, Muzna; Ward, Patrick S.; Makhija, Simrin; Spielman, David J.
    Abstract: In many developing countries, agricultural policies and programs are often designed in a way to promote productivity growth with modern inputs and technologies, and with limited reference to the nutrition gains that can be made through production diversification. We test whether grassroots programs can relax behavioral constraints inhibiting the adoption of diversified nutrition-sensitive production systems. We use a series of lab-in-field experiments and survey instruments in Odisha, India to elicit male and female farmers’ preferences for risk, aversion to loss, empowerment and aspirations for one’s self and children. We find that respondents in villages where grassroots interventions were promoted showed significantly lower levels of risk aversion, higher levels of loss aversion and higher aspirations for themselves and their children, along with improvements in production and consumption diversity. Insights into the prevalence of behavioral constraints and interventions that relax such constraints fills an important knowledge gap in how to design programs that promote more nutrition-sensitive food production systems.
    Keywords: INDIA, SOUTH ASIA, ASIA, nutrition, production systems, agricultural productivity, diversification, food systems, intervention, agri-food systems, laboratory-in-field experiments, prospect theory, public goods games, diversified food, grassroots interventions,
    Date: 2019
  11. By: Daniel, Aemiro Melkamu (Department of Economics, Umeå University)
    Abstract: Paper [I] investigates household heterogeneity in valuing electricity contract attributes that include various load controls and information sharing to induce demand flexibility. Using a stated preference choice experiment conducted with Swedish households, this paper shows that, although a large proportion of households asks for substantial compensation, some households are willing to share their electricity consumption information and require relatively lower compensation to allow load controls. In addition, this paper finds that some households that are willing to provide flexibility by accepting load controls at a relatively low compensation ask for sizeable compensation to share their electricity consumption information, and vice versa. From the perspective of the contract providers, these findings suggest that information-optional contracts can generate more customers than contracts that bundle households’ consumption information with various load controls. Paper [II] uses a flexible model to accommodate heterogeneous decision rules in analysing data obtained from a discrete choice experiment aimed at eliciting Swedish households’ willingness to accept compensation for restrictions on household electricity and heating use during peak hours. The model combines behavioural processes based on random utility maximization with an elimination-by-aspects strategy, where the latter involves a two-stage decision process. In the first stage, respondents are allowed to eliminate from their choice set alternatives that contain an unacceptable level, in this case restrictions on the use of heating and electricity. In the second stage, respondents choose between the remaining alternatives in a rational utility maximizing manner. Our results show that about half of the respondents choose according to an elimination-by-aspects strategy, and considering elimination-by-aspects behaviour leads to a downward shift in elicited willingness-to-accept. Paper [III] tests the effect of a pro-environmental framing on households’ stated willingness to accept restrictions on their electricity use. We use a split-sample choice experiment and ask respondents to choose between their current electricity contract and hypothetical contracts featuring various load controls and monetary compensation. Our results indicate that the pro-environmental framing has little impact on the respondents’ choices. We observe a significant framing effect on choices and marginal willingness-to-accept for only a few contract attributes. The results further suggest that there is no significant framing effect among households that are already engaged in pro-environmental activities. Paper [IV] explores the socio-demographic and housing characteristics that affect household fuel choice and fuel use decisions in urban Ethiopia. The results indicate that, whereas households with a female head are more likely to combine traditional solid (firewood and charcoal) and modern (electricity) fuels for different uses, households with less-educated heads, many family members, and poor living conditions (fewer rooms) tend to use traditional solid biomass fuels. We find that households with an individual electricity meter are significantly less likely to use charcoal. Further, the results show the satiation effect from the increasing use of a fuel by households is relatively higher for firewood and lower for electricity.
    Keywords: Choice experiment; demand flexibility; electricity contract; fuel choice; fuel stacking; household heterogeneity; load control; pro-environmental framing; willingness-to-accept
    JEL: C25 C99 D01 D12 Q42 Q48 Q51
    Date: 2020–03–10
  12. By: Sabiou M. Inoua (Economic Science Institute, Chapman University); Vernon L. Smith (Economic Science Institute, Chapman University)
    Abstract: This paper introduces and formalizes the classical view on supply and demand, which, we argue, has an integrity independent and distinct from the neoclassical theory. Demand and supply, before the marginal revolution, are defined not by an unobservable criterion such as a utility function, but by an observable monetary variable, the reservation price: the buyer’s (maximum) willingness to pay (WTP) value (a potential price) and the seller’s (minimum) willingness to accept (WTA) value (a potential price) at the marketplace. Market demand and supply are the cumulative distribution of the buyers’ and sellers’ reservation prices, respectively. This WTP WTA classical view of supply and demand formed the means whereby market participants were motivated in experimental economics although experimentalists (trained in neoclassical economics) were not cognizant of their link to the past. On this foundation was erected a vast literature on the rules of trading for a host of institutions, modern and ancient. This paper documents textually this reappraisal of classical economics and then formalizes it mathematically. A follow-up paper will articulate a theory of market price formation rooted in this classical view on supply and demand and in experimental findings on market behavior.
    Keywords: History of Economic Thought; Methodology of Economics; Microeconomic Theory; Experimental Economics
    JEL: B C D
    Date: 2020
  13. By: Roy, Sandeepan (Asian Development Bank Institute); Maji, Avijit (Asian Development Bank Institute)
    Abstract: High-speed railway (HSR) planners aim to select locations that optimize the overall utility or benefit of HSR stations by satisfying various desirable requirements. Among other factors, accessibility and environmental impact are important considerations for selecting a location for an HSR station. The desirable requirements of these two factors include improved access to, and intermodal integration with, existing transportation facilities and services (like airports, train stations, and bus stops); avoidance of environmentally sensitive areas (such as water bodies, wetlands, and forest) and land with higher right-of-way costs; and accommodation of strategic necessities (for example, proximity to city centers and socioeconomic development hubs). We quantify the overall utility of an HSR station by analyzing the extent to which a location satisfies these desirable requirements. For this, suitable utility functions were developed and evaluated. To obtain individual utility scores, we assigned appropriate weights based on relative importance. We then estimated the overall utility of a location as the weighted summation of these utility scores. A GIS-based analytical framework was specifically developed for geo-processing, mapping, and visualization of the geospatial data analysis and result representation. This utility-based quantification and identification process would be useful to planners in assessing an area and determining the most suitable station locations for an HSR project. The proposed model was used to identify the potential station locations along the Mumbai-Ahmedabad HSR corridor in India and to compare the obtained results with the planned locations of the project.
    Keywords: high-speed rail stations; geographic information systems; environmental impact; accessibility; utility functions
    JEL: L92 R11 R41 R58
    Date: 2019–05–16
  14. By: Takeshi Kato; Yasuyuki Kudo; Junichi Miyakoshi; Jun Otsuka; Hayato Saigo; Kaori Karasawa; Hiroyuki Yamaguchi; Yoshinori Hiroi; Yasuo Deguchi
    Abstract: We introduce a decision-making model based on value functions that include individualistic utility function and socio-constructivistic norm function, and propose a norm-fostering process that recursively updates norm function through mutual recognition between the self and others. As an example, we will look at the resource-sharing problem typical of economic activities and assume the distribution of individual actions to define the (1) norm function fostered through mutual comparison of value/action ratio based on the equity theory (progressive tax-like), (2) norm function proportional to resource utilization (proportional tax-like) and (3) fixed norm function independent of resource utilization (fixed tax-like). And, by carrying out numerical simulation, we will show that the progressive tax-like norm function (i) does not increase disparity for the distribution of the actions, unlike the other norm functions, and (ii) has high resource productivity and low Gini coefficient, i.e., the progressive tax-like norm function has the highest sustainability and fairness.
    Date: 2020–02

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