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on Utility Models and Prospect Theory |
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Issue of 2020‒08‒24
thirty papers chosen by |
| By: | Federica Ceron (Université Paris Est Créteil); Vassili Vergopoulos (Centre d'Economie de la Sorbonne - Paris School of Economics; https://centredeconomiesorbonne.univ-paris1.fr) |
| Abstract: | We provide an axiomatic characterization of recursive Maxmin preferences that stem from (possibly) incomplete preferences representing choices that are justified by hard evidence. The decision-maker disposes of objective probabilistic information that may induce dynamically inconsistent behavior. To ensure that her choices be informed by objective information, dynamically consistent, and ambiguity averse, she constructs her subjective set of priors as the rectangular hull of the objective information set. The characterization builds upon two axioms that naturally combine these three requirements in a behavioral way. Moreover, our main result suggests a principled justification for the use of recursive Maxmin preferences in applications to dynamic choice problems |
| Keywords: | Rectangularity; Rectangularization; Maxmin Expected Utility; Unanimity Rule; Dynamic Consistency; Prior-by-prior Updating; Objective and Subjective Rationality |
| JEL: | D81 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:20008&r=all |
| By: | Loïc Berger; Massimo Marinacci (Bocconi University [Milan, Italy]) |
| Abstract: | We review recent models of choices under uncertainty that have been proposed in the economic literature. In particular, we show how different concepts and methods of economic decision theory can be directly useful for problems in environmental economics. The framework we propose is general and can be applied in many different fields of environmental economics. To illustrate, we provide a simple application in the context of an optimal mitigation policy under climate change. |
| Keywords: | Ambiguity,non-expected utility,model uncertainty,climate change |
| Date: | 2020–08–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-02914088&r=all |
| By: | Andrea Hackethal; Michael Kirchler; Christine Laudenbach; Michael Razen; Annika Weber |
| Abstract: | Incentivized experiments in which individuals receive monetary rewards according to the outcomes of their decisions are regarded as the gold standard for preference elicitation in experimental economics. These task-related real payments are considered necessary to reveal subjects' "true preferences". Using a systematic, large-sample approach with three subject pools of private investors, professional investors, and students, we test the effect of task-related monetary incentives on risk preferences elicited in four standard experimental tasks. We find no systematic differences in behavior between subjects in the incentivized and non-incentivized regimes. We discuss implications for academic research and for applications in the field. |
| Keywords: | Risk Preferences, Incentives, Experimental Economics, Risk Aversion |
| JEL: | C91 D01 D81 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2020-29&r=all |
| By: | Sacha Bourgeois-Gironde (Laboratory of modern economics - UP2 - Université Panthéon-Assas); Alda Mari (IJN - Institut Jean-Nicod - DEC - Département d'Etudes Cognitives - ENS Paris - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - Département de Philosophie - ENS Paris - ENS Paris - École normale supérieure - Paris); David Nicolas (IJN - Institut Jean-Nicod - DEC - Département d'Etudes Cognitives - ENS Paris - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - Département de Philosophie - ENS Paris - ENS Paris - École normale supérieure - Paris); David Blunier |
| Abstract: | This paper explores the impact of language on behaviour studying the impact of mood in a probabilistic choice context. Building on the idea of "aversion to ambiguity" according to which subjects prefer situations in which probabilities are known over those in which they are not known, we have systematically tested the association of sentence mood with choice situations. We found that with indicative the aversion to ambiguity is confirmed, whereas with the subjunctive, it is not. This indicates that grammatical features can influence the way in which subjects apprehend choices in probabilistic contexts. Goal While modern economic theories have soundly established a connection between economic behavior and psychology, there is a new and growing interest in the connection between language and behavior. This paper studies one aspect of this connection by addressing choices in probabilistic contexts. Specifically, we study how the verbalization of mental states accompanying choices in probabilistic contexts can modify what psychology based economic theories have labelled as the "standard" behavior. We show here that certain grammaticalized features of natural language can impact the expectations solely based on psychological considerations. |
| Keywords: | subjunctive,mood,decision theory,language,ambiguity,risk |
| Date: | 2019–09–25 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-02869834&r=all |
| By: | Ivan Guo (Monash University [Melbourne]); Nicolas Langrené (CSIRO - Commonwealth Scientific and Industrial Research Organisation [Canberra]); Gregoire Loeper (Monash University [Melbourne]); Wei Ning (Monash University [Melbourne]) |
| Abstract: | This paper addresses the problem of utility maximization under uncertain parameters. In contrast with the classical approach, where the parameters of the model evolve freely within a given range, we constrain them via a penalty function. We show that this robust optimization process can be interpreted as a two-player zero-sum stochastic differential game. We prove that the value function satisfies the Dynamic Programming Principle and that it is the unique viscosity solution of an associated Hamilton-Jacobi-Bellman-Isaacs equation. We test this robust algorithm on real market data. The results show that robust portfolios generally have higher expected utilities and are more stable under strong market downturns. To solve for the value function, we derive an analytical solution in the logarithmic utility case and obtain accurate numerical approximations in the general case by three methods: finite difference method, Monte Carlo simulation, and Generative Adversarial Networks. |
| Keywords: | robust portfolio optimization,differential games,HJBI equation,Generative adversarial networks,GANs,Monte Carlo |
| Date: | 2020–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-02910261&r=all |
| By: | Chao Deng; Xizhi Su; Chao Zhou |
| Abstract: | We establish a Nash equilibrium in a market with $ N $ agents with the performance criteria of relative wealth level when the market return is unobservable. Each investor has a random prior belief on the return rate of the risky asset. The investors can be heterogeneous in both the mean and variance of the prior. By a separation result and a martingale argument, we show that the optimal investment strategy under a stochastic return rate model can be characterized by a fully-coupled linear FBSDE. Two sets of deep neural networks are used for the numerical computation to first find each investor's estimate of the mean return rate and then solve the FBSDEs. We establish the existence and uniqueness result for the class of FBSDEs with stochastic coefficients and solve the utility game under partial information using deep neural network function approximators. We demonstrate the efficiency and accuracy by a base-case comparison with the solution from the finite difference scheme in the linear case and apply the algorithm to the general case of nonlinear hidden variable process. Simulations of investment strategies show a herd effect that investors trade more aggressively under relativeness concerns. Statistical properties of the investment strategies and the portfolio performance, including the Sharpe ratios and the Variance Risk ratios (VRRs) are examed. We observe that the agent with the most accurate prior estimate is likely to lead the herd, and the effect of competition on heterogeneous agents varies more with market characteristics compared to the homogeneous case. |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2007.11781&r=all |
| By: | Spencer Bastani (Department of Economics and Statistics, School of Business and Economics, Linnaeus University,Sweden); Thomas Giebe (Department of Economics and Statistics, School of Business and Economics, Linnaeus University,Sweden); Oliver Gürtler (Department of Economics, University of Cologne, Germany) |
| Abstract: | We develop a general framework for studying contests, including the well-known models of Tullock(1980) and Lazear & Rosen (1981) as special cases. The contest outcome depends on players’ efforts and skills, the latter being subject to symmetric uncertainty. The model is tractable, because asymmetric equilibrium exists under general assumptions regarding production technologies and skill distributions. Using a link between our contest model and expected utility theory, we are able to derive new comparative statics results regarding how the size and composition of contests affect equilibrium effort, showing how standard results can be overturned. We also discuss the robustness ofour results to changes in the information structure and the implications of our findings for the optimal design of teams. |
| Keywords: | contest theory, symmetric equilibrium, heterogeneity, risk, stochastic dominance |
| JEL: | C72 D74 D81 J23 M51 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:ajk:ajkdps:005&r=all |
| By: | Tomáš Jagelka (ECONtribute Cluster of Excellence, IZA, Institute for Applied Microeconomics at the University of Bonn, and CEHD at the University of Chicago.) |
| Abstract: | This paper proposes a method for empirically mapping psychological personality traits to economic preferences. Careful modelling of random components of decision making is crucial to establishing the long supposed but empirically elusive link between economic and psychological systems for understanding differences in individuals’ behavior. I use factor analysis to extract information on individuals’ cognitive ability and personality and embed it within a Random Preference Model to estimate distributions of risk and time preferences, of their individual-level stability, and of people’s propensity to make mistakes. I explain up to 50% of the variation in both average risk and time preferences and in individuals’ capacity to make consistent rational choices using four factors related to cognitive ability and three of the Big Five personality traits. True differences in desired outcomes are related to differences in personality whereas actual mistakes in decisions are related to cognitive skill. |
| Keywords: | economic preferences, personality traits, decision error, measurement error, stochastic discrete choice |
| JEL: | D91 D80 D01 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:ajk:ajkdps:014&r=all |
| By: | Heiko Karle; Heiner Schumacher; Rune Vølund |
| Abstract: | We consider a model of Bertrand competition where consumers are uncertain about the qualities and prices of firms’ products. Consumers can inspect all products at zero cost. A share of consumers is expectation-based loss averse. For these consumers, a purchase plan, which involves buying products of varying quality and price with positive probability, creates scale-dependent disutility from gain-loss sensations. Even if their degree of loss aversion is modest, they may refrain from inspecting all products and choose an individual default that is first-order stochastically dominated. Firms’ strategic behavior can exacerbate the scope for this “uncertainty effect”, and sellers of inferior products may earn positive profits despite Bertrand competition. We find suggestive evidence for the predicted association between consumer behavior and loss aversion in new survey data. |
| Keywords: | Consumer Search, Competition, Loss Aversion |
| Date: | 2020–07–29 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:657766&r=all |
| By: | Timothy M. Christensen |
| Abstract: | This paper derives primitive, easily verifiable sufficient conditions for existence and uniqueness of recursive utilities for a number of important classes of preferences. In order to accommodate models commonly used in practice, we allow both the statespace and per-period utilities to be unbounded. For many of the models we study, existence and uniqueness is established under a single "thin tail" condition on the distribution of growth in per-period utilities. We illustrate our approach with applications to robust preferences, models of ambiguity aversion and learning about hidden states, dynamic discrete choice models, and Epstein-Zin preferences. |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2008.00963&r=all |
| By: | Loïc Berger (LEM - Lille économie management - LEM - UMR 9221 - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique, CNRS - Centre National de la Recherche Scientifique, IÉSEG School Of Management [Puteaux]); Louis Eeckhoudt (LEM - Lille économie management - LEM - UMR 9221 - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | Diversification is a basic economic principle that helps to hedge against uncertainty. It is therefore intuitive that both risk aversion and ambiguity aversion should positively affect the value of diversification. In this paper, we show that this intuition (1) is true for risk aversion but (2) is not necessarily true for ambiguity aversion. We derive sufficient conditions, showing that, contrary to the economic intuition, ambiguity and ambiguity aversion may actually reduce the diversification value. |
| Keywords: | Diversification,ambiguity aversion,model uncertainty,hedging |
| Date: | 2020–08–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-02910906&r=all |
| By: | Simone Cerreia-Vioglio; Fabio Maccheroni; Massimo Marinacci; Aldo Rustichini |
| Abstract: | We prove that a random choice rule satisfies Luce's Choice Axiom if and only if its support, the set of "alternatives that can be chosen," is a choice correspondence that satisfies the Weak Axiom of Revealed Preference, and random choice occurs according to a stochastic tie breaking among optimizers that satisfies Renyi's Conditioning Axiom. Our result shows that the Choice Axiom is, in a precise formal sense, a probabilistic version of the Weak Axiom. It thus supports Luce's view of his own axiom as a "canon of probabilistic rationality." |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2007.11386&r=all |
| By: | Wen Chen; Nicolas Langren\'e |
| Abstract: | In this paper, we develop a deep neural network approach to solve a lifetime expected mortality-weighted utility-based model for optimal consumption in the decumulation phase of a defined contribution pension system. We formulate this problem as a multi-period finite-horizon stochastic control problem and train a deep neural network policy representing consumption decisions. The optimal consumption policy is determined by personal information about the retiree such as age, wealth, risk aversion and bequest motive, as well as a series of economic and financial variables including inflation rates and asset returns jointly simulated from a proposed seven-factor economic scenario generator calibrated from market data. We use the Australian pension system as an example, with consideration of the government-funded means-tested Age Pension and other practical aspects such as fund management fees. The key findings from our numerical tests are as follows. First, our deep neural network optimal consumption policy, which adapts to changes in market conditions, outperforms deterministic drawdown rules proposed in the literature. Moreover, the out-of-sample outperformance ratios increase as the number of training iterations increases, eventually reaching outperformance on all testing scenarios after less than 10 minutes of training. Second, a sensitivity analysis is performed to reveal how risk aversion and bequest motives change the consumption over a retiree's lifetime under this utility framework. Third, we provide the optimal consumption rate with different starting wealth balances. We observe that optimal consumption rates are not proportional to initial wealth due to the Age Pension payment. Forth, with the same initial wealth balance and utility parameter settings, the optimal consumption level is different between males and females due to gender differences in mortality. |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2007.09911&r=all |
| By: | Bekkers, Eddy; Francois, Joseph; Nelson, Doug R; Rojas-Romagosa, Hugo |
| Abstract: | This paper assesses the utility of economic theory of rational trade wars to predict such events or to prescribe courses of action to control their consequences. Trade wars are fundamentally political events whose causes are almost completely political and whose consequences are to a significant degree also political. Contemporary economic theory has developed during a uniquely peaceful and liberal period in world history, affecting how economists have thought about trade conflicts, leaving the profession unprepared to provide serious analysis or advice. |
| Keywords: | general equilibrium trade models; International Political Economy; optimal taxation; trade wars |
| JEL: | F13 F14 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14079&r=all |
| By: | Aronsson, Thomas (Department of Economics, Umeå University); Hetschko, Clemens (University of Leeds and CESifo, Munich); Schöb, Ronnie (Freie Universität Berlin and CESifo) |
| Abstract: | Societies see growing support for populist politicians who advocate an end to globalization. Our behavioral economics model links impatience to voters’ appraisals of an income shock due to globalization that is associated with short-run costs and delayed gains. The model shows that impatient individuals may reject further globalization if they are subject to borrowing constraints. Using German data, we confirm that impatient voters choose right-wing antiglobalist parties. Similarly, we show for the United Kingdom that a preference for immediate gratification increases the support for right-wing anti-globalist parties as well as for Brexit. A policy implication of our study is that governments may use up-front redistribution to gain voters’ support for further globalization. |
| Keywords: | Globalization; time-preference; impatience; time-inconsistency; populism; Brexit; up-front redistribution |
| JEL: | D72 D91 F15 F61 F68 H53 |
| Date: | 2020–07–22 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:umnees:0978&r=all |
| By: | Emma Hubert |
| Abstract: | This paper studies continuous-time optimal contracting in a hierarchy problem which generalises the model of Sung (2015). The hierarchy is modeled by a series of interlinked principal-agent problems, leading to a sequence of Stackelberg equilibria. More precisely, the principal can contract with the managers to incentivise them to act in her best interest, despite only observing the net benefits of the total hierarchy. Managers in turn subcontract with the agents below them. Both agents and managers independently control in continuous time a stochastic process representing their outcome. First, we show through a continuous-time adaptation of Sung's model that, even if the agents only control the drift of their outcome, their manager controls the volatility of their continuation utility. This first simple example justifies the use of recent results on optimal contracting for drift and volatility control, and therefore the theory of second-order backward stochastic differential equations, developed in the theoretical part of this paper, dedicated to a more general model. The comprehensive approach we outline highlights the benefits of considering a continuous-time model and opens the way to obtain comparative statics. We also explain how the model can be extended to a large-scale principal-agent hierarchy. Since the principal's problem can be reduced to only an $m$-dimensional state space and a $2m$-dimensional control set, where $m$ is the number of managers immediately below her, and is therefore independent of the size of the hierarchy below these managers, the dimension of the problem does not explode. |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2007.10758&r=all |
| By: | Simone Cerreia-Vioglio; Lars Peter Hansen; Fabio Maccheroni; Massimo Marinacci |
| Abstract: | We use decision theory to confront uncertainty that is sufficiently broad to incorporate "models as approximations." We presume the existence of a featured collection of what we call "structured models" that have explicit substantive motivations. The decision maker confronts uncertainty through the lens of these models, but also views these models as simplifications, and hence, as misspecified. We extend min-max analysis under model ambiguity to incorporate the uncertainty induced by acknowledging that the models used in decision-making are simplified approximations. Formally, we provide an axiomatic rationale for a decision criterion that incorporates model misspecification concerns. |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2008.01071&r=all |
| By: | Philippe Bance (LC2S - Laboratoire caribéen de sciences sociales - UA - Université des Antilles - CNRS - Centre National de la Recherche Scientifique); Angélique Chassy (EM Normandie - École de Management de Normandie) |
| Abstract: | The Contingent Valuation Method (CVM) is a tool of economic analysis whose purpose is to measure, on the basis of individuals' stated preferences, the utility they attach to the production of public goods, thereby enabling a public decision-maker to arbitrate between different items of expenditure. The approach has been deployed as part of a centralist conceptual scheme that leaves little room for citizens in the decision-making process and is now being challenged by the increasing prominence of multilevel governance, particularly in Europe. The purpose of this article is to discuss the use in this context of citizen advisory committees (CACs) rather than the other participatory tools sometimes recommended in contingent valuation studies, such as citizen juries and the scenario workshop. It also discusses the limitations of the CAC/CVM combination in order to ensure that citizens' opinions are fully taken into account in the specification and implementation of public programmes. |
| Keywords: | Citizen participation,public goods,public decision-making,public management,valuation,willingness to pay |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-02910722&r=all |
| By: | Ruben Loaiza-Maya; Didier Nibbering |
| Abstract: | The multinomial probit model is a popular tool for analyzing choice behaviour as it allows for correlation between choice alternatives. Because current model specifications employ a full covariance matrix of the latent utilities for the choice alternatives, they are not scalable to a large number of choice alternatives. This paper proposes a factor structure on the covariance matrix, which makes the model scalable to large choice sets. The main challenge in estimating this structure is that the model parameters require identifying restrictions. We identify the parameters by a trace-restriction on the covariance matrix, which is imposed through a reparamatrization of the factor structure. We specify interpretable prior distributions on the model parameters and develop an MCMC sampler for parameter estimation. The proposed approach substantially improves performance in large choice sets relative to existing multinomial probit specifications. Applications to purchase data show the economic importance of including a large number of choice alternatives in consumer choice analysis. |
| Keywords: | multinomial probit model, factor analysis, parameter identification, spherical coordinates |
| JEL: | C11 C25 C35 C38 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:msh:ebswps:2020-25&r=all |
| By: | Thanasis Ziogas; Dimitris Ballas; Sierdjan Koster; Arjen Edzes |
| Abstract: | This article uses data of subjective Life Satisfaction aggregated to the community level in Canada and examines the spatial interdependencies and spatial spillovers of community happiness. A theoretical model of utility is presented. Using spatial econometric techniques, we find that the utility of community, proxied by subjective measures of life satisfaction, is affected both by the utility of neighbouring communities as well as by the latter's average household income and unemployment rate. Shared cultural traits and institutions may justify such spillovers. The results are robust to the different binary contiguity spatial weights matrices used and to the various econometric models. Clusters of both high-high and low-low in Life Satisfaction communities are also found based on the Moran's I test |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2007.11580&r=all |
| By: | Elizabeth Badlwin (Dept of Economics and Hertford College, University of Oxford); Omer Edhan (Department of Economics, University of Manchester); Ravi Jagadeesan (Harvard Business School and Department of Economics, Harvard University); Paul Klemperer (Department of Economics and Nuffield College, University of Oxford); Alexander Teytelboym (Department of Economics, Institute for New Economic Thinking, and St. Catherine’s College, University of Oxford) |
| Abstract: | We show that, with indivisible goods, the existence of competitive equilibrium fundamentally depends on agents’ substitution effects, not their income effects. Our Equilibrium Existence Duality allows us to transport results on the existence of competitive equilibrium from settings with transferable utility to settings with income effects. One consequence is that net substitutability—which is a strictly weaker condition than gross substitutability—is sufficient for the existence of competitive equilibrium. We also extend the “demand types” classification of valuations to settings with income effects and give necessary and sufficient conditions for a pattern of substitution effects to guarantee the existence of competitive equilibrium. JEL codes: C62, D11, D44 |
| Date: | 2020–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:nuf:econwp:2008&r=all |
| By: | Dominique Pépin (University of Poitiers); Stephen M. Miller (University of Nevada, Las Vegas) |
| Abstract: | We investigate the time variations of the relative risk aversion parameter of a U.S. representative agent using 60 years of stock market data. We develop a methodology to identify the variables that explain the variations of risk aversion, based on an asset pricing model without valuation (or preference) risk. In this framework, the variables that predict the excess return of a market index (but not the second moments) also explain the variations of risk aversion. To wit, the variables include the price-dividend ratio and the short-term interest rate. A shock on the dividend-price ratio exerts a positive, highly persistent, though modest, effect on risk aversion, while a shock on the short-term interest rate exerts a highly negative, less persistent effect. The resulting measure of risk aversion follows a macroeconomically and financially countercyclical pattern. |
| Keywords: | Time-varying risk aversion, Price-dividend ratio, Short-term interest rate, Return predictors |
| JEL: | G10 G12 G17 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2020-09&r=all |
| By: | Shuvojit Banerjee (Macroeconomic Policy and Financing for Development Division, United Nations Economic and Social Commission for Asia and the Pacific) |
| Abstract: | Making consumption more sustainable is particularly important in Asia-Pacific given the dramatic trends being witnessed in the region. The region is expected to be at the forefront of worldwide consumption by 2030, with consumer spending projected to reach $32 trillion and constitute about 42 per cent of global consumption, carrying with it implications for the environment. Nudging can be part of the toolkit to support consumers in making sustainable purchasing decisions. It is particularly attractive because of its ability to predictably change behavior without forbidding any options or without the need to provide economic incentives. Nudges are positive reinforcements, small suggestions, or changes in choice architecture intended to influence the behavior of consumers. |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:unt:pbmpdd:pb106&r=all |
| By: | Alexandre de Carvalho; Thiago Trafane Oliveira Santos |
| Abstract: | The ex-post or historical equity risk premium in Brazil is low compared to other countries. In this paper we seek to evaluate whether this is a result of a compressed ex-ante equity risk premium, using two different approaches. First, we investigate the effects of government-controlled shareholders, which could lower the risk premium if the government is also interested in nonpecuniary benefits. To verify this, we estimate the Brazilian equity risk premium from 2002 to 2017 using cross-section regressions based on the CAPM and the Gordon model, but supposing stocks are priced differently by government and private investors. An important feature of this approach is that we control for the possible impact of the government as firm’s manager on the perceived risk of the firm. Our results suggest the government does not compress the equity risk premium, although the government as a manager seems to influence the firms’ risk. Second, we decompose the Brazilian equity risk premium using a global CAPM estimated with quarterly data from 47 countries and find it is consistent with international risk premia. Therefore, the findings from the two approaches indicate the low ex-post risk premium in Brazil seems to be a consequence of a relatively short time series rather than a Brazilian idiosyncrasy. |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:527&r=all |
| By: | Michel Grabisch (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Peter Sudhölter (Department of Business and Economics - SDU - University of Southern Denmark) |
| Abstract: | A balanced transferable utility game (N, v) has a stable core if its core is externally stable, that is, if each imputation that is not in the core is dominated by some core element. Given two payoff allocations x and y, we say that x outvotes y via some coalition S of a feasible set if x dominates y via S and x allocates at least v(T) to any feasible T that is not contained in S. It turns out that outvoting is transitive and the set M of maximal elements with respect to outvoting coincides with the core if and only if the game has a stable core. By applying the duality theorem of linear programming twice, it is shown that M coincides with the core if and only if a certain nested balancedness condition holds. Thus, it can be checked in finitely many steps whether a balanced game has a stable core. We say that the game has a super-stable core if each payoff vector that allocates less than v(S) to some coalition S is dominated by some core element and prove that core super-stability is equivalent to vital extendability, requiring that each vital coalition is extendable. |
| Abstract: | Un jeu à utilité transférable équilibré (N,v) a un coeur stable si son coeur est externalement stable, c'est-à-dire si chaque imputation hors du coeur est dominée par un élément du coeur. Etant donné deux paiements x et y, on dit que x surclasse y via une coalition S d'un ensemble réalisable si x dominie y via S et si x alloue au moins v(T) à toute coalition réalisable T qui n'est pas contenue dans S. Il s'ensuit que la relation de surclassement est transitive et que l'ensemble M des éléments maximaux par rapport au surclassement coïncide avec le coeur si et seulement si une certaine condition emboîtée d'équilibrage est vérifiée. Ainsi, on peut vérifier en un nombre fini d'étapes si un jeu équilibré à un coeur stable. On dit qu'un jeu a un coeur super-stable si tout vecteur de paiement qui alloue moins que v(S) à une coalition S est dominé par un élément du coeur, et nous prouvons que la super-stabilité du coeur est équivalente à l'étendabilité vitale, qui requiert que toute coalition vitale soit étendable. |
| Keywords: | Domination,stable set,core,TU game,ensemble stable,coeur,jeux TU |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-02900564&r=all |
| By: | David Meunier |
| Abstract: | This paper discusses whether changes in mobility practices affect value of travel time savings. It considers the relationship between the theory of the value of time and its practical application in traffic models and cost-benefit analysis. The discussion covers the need to distinguish variations in utility due to changes in the quantity and quality of time spent in travelling, the relationships between changes in value of time and mobility practices and between collective and individual values of time. |
| Date: | 2020–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:oec:itfaab:2020/01-en&r=all |
| By: | Matthias Sutter; Michael Weyland; Anna Untertrifaller; Manuel Froitzheim |
| Abstract: | We present the results of a randomized intervention in schools to study how teaching financial literacy affects risk and time preferences of adolescents. Following ore than 600 adolescents, aged 16 years on average, over about half a year, we provide causal evidence that teaching financial literacy has significant short-term and longer-term effects on risk and time preferences. Compared to two different control treatments, we find that teaching financial literacy makes subjects more patient, less present-biased, and slightly more risk-averse. Our finding that the intervention changes economic preferences contributes to a better understanding of why financial literacy has been shown to correlate systematically with financial behavior in previous studies. We argue that the link between financial literacy and field behavior works through economic preferences. In our study, the latter are also related in a meaningful way to students' field behavior. |
| Keywords: | Financial literacy, randomized intervention, risk preferences, time preferences, field experiment |
| JEL: | C93 D14 I21 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2020-27&r=all |
| By: | Ignazio Visco (Bank of Italy); Giordano Zevi (Bank of Italy) |
| Abstract: | Starting from Simon’s bounded rationality notion, in this study we consider some of the links between concepts of bounded rationality and the approaches followed by economists in their analysis of the role played by economic agents’ expectations in driving the evolution of the economy through time. We argue that the degree of attention devoted to the formation of expectations by the macroeconomic theory has followed high and low cycles. In recent years, the increasing availability of survey data and the failings of models based on purely rational representative agents have prompted renewed interest in inquiries into the direct measurement of expectations and empirical studies of their formation. The intellectual legacy of Herbert Simon provides a useful guide for both these activities. |
| Keywords: | bounded rationality, expectations, Herbert Simon |
| JEL: | B3 D80 D9 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_575_20&r=all |
| By: | Philippe Bance (UA - Université des Antilles); Angélique Chassy (CREAM - Centre de Recherche en Economie Appliquée à la Mondialisation - UNIROUEN - Université de Rouen Normandie - NU - Normandie Université - IRIHS - Institut de Recherche Interdisciplinaire Homme et Société - UNIROUEN - Université de Rouen Normandie - NU - Normandie Université) |
| Abstract: | The Contingent Valuation Method (CVM) is an economic analysis tool used to measure, the utility of producing of public goods, based upon individual's declared preferences. The public decision-maker is thus able to arbitrate between the expenditure to be made. The approach has been deployed in a centralist conceptual plan, leaving little room for citizens in the decision-making process and it has been undermined by the rise in power, notably in Europe, of multi-level governance. The decision-maker is no longer alone in this process and public decision-making must operate on the basis of common views adopted by various levels of government that should also establish much stronger links with the citizen-users of public goods. This article analyzes the operational impact of Citizen Advisory Committees (CAC) as participative tools of CVM to resulting in an effective cooperation between the various public actors and the civil society in public decision-making. |
| Keywords: | public management,citizen participation,multilevel governance,individual preferences,monetarisation,public decision |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-02910727&r=all |
| By: | Hubar, Sylwia; Koulovatianos, Christos; Li, Jian |
| Abstract: | In fifteen European countries, China, and the US, stocks and business equity as a share of total household assets are represented by an increasing and convex function of income/wealth. A parsimonious model fitted to the data shows why background labor-income risk can explain much of this risk-taking pattern. Uncontrollable labor-income risk stresses middle-income households more because labor income is a larger fraction of their total lifetime resources compared with the rich. In response, middle-income households reduce (controllable) financial risk. Richer households, having less pressure, can afford more risk-taking. The poor take low risk because they avoid jeopardizing their subsistence consumption. |
| Keywords: | background risk,household-portfolio shares,business equity,subsistence consumption,wealth inequality |
| JEL: | G11 D91 D81 D14 D11 E21 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:640&r=all |