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on Utility Models and Prospect Theory |
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Issue of 2021‒03‒29
sixteen papers chosen by |
| By: | Paolo Delle Site; André de Palma; Karim Kilani (Université de Cergy-Pontoise, THEMA) |
| Abstract: | We study the welfare change from project and policies when consumers’ behaviour is described with additive random utility models. We consider the random compensating variation mainstream approach and review the latest methodological developments. The expectation of the random compensating variation is used as a measure of the average welfare change. Without income effect, it is expressed by the monetized difference of the expectations of the maximum utilities with and without the changes in monetary costs or quality. This measure reduces for the multinomial logit model to the logsum formula. More generally, the expectation of the compensating variation can be expressed as a path-independent line integral. The rule-of-a-half is an approximation of this line integral. With income effect, the expectation of the compensating variation, both unconditional and conditional on the choices without and with the changes, is provided by one-dimensional integrals which can be computed numerically. In the conditional case, the average welfare change is attributed to those keeping and those changing alternative. The cumulative distribution function of the compensating variation allows the analysis of inequalities by extending the classical Lorenz curve and Gini coefficient. This analysis is perfomed distinctly for positive and for negative values of the compensating variation. Treatment of observed and unobserved heterogeneity is included. The survey of theoretical results is illustrated with a numerical example in the context of transportation mode choice, based on large-scale data collected in France. |
| Keywords: | random utility model; compensating variation; Gini coefficient; Lorenz curve; rule-of-a-half |
| JEL: | D11 D30 D60 R41 R42 R48 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2021-11&r=all |
| By: | David Orrell; Monireh Houshmand |
| Abstract: | This paper describes an approach to economics that is inspired by quantum computing, and is motivated by the need to develop a consistent quantum mathematical framework for economics. The traditional neoclassical approach assumes that rational utility-optimisers drive market prices to a stable equilibrium, subject to external perturbations. While this approach has been highly influential, it has come under increasing criticism following the financial crisis of 2007/8. The quantum approach, in contrast, is inherently probabilistic and dynamic. Decision-makers are described, not by a utility function, but by a propensity function which specifies the probability of transacting. We show how a number of cognitive phenomena such as preference reversal and the disjunction effect can be modelled by using a simple quantum circuit to generate an appropriate propensity function. Conversely, a general propensity function can be quantized to incorporate effects such as interference and entanglement that characterise human decision-making. Applications to some common problems in economics and finance are discussed. |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2103.10938&r=all |
| By: | Le Van, Cuong; Pham, Ngoc-Sang |
| Abstract: | We study the existence of equilibrium when agents’ preferences may not be convex. For some specific utility functions, we provide a necessary and sufficient condition under which there exists an equilibrium. The standard approach cannot be directly applied to our examples because the demand correspondence of some agents is neither single valued nor convex valued. |
| Keywords: | Non-convex preferences, general equilibrium. |
| JEL: | D11 D51 |
| Date: | 2021–03–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:106774&r=all |
| By: | Britto, Anthony; Dehler-Holland, Joris; Fichtner, Wolf |
| Abstract: | Despite the vast literature on the energy-efficiency gap, there is a general dearth of investment models which incorporate the consumer's temporal freedom in the investment decision. Focusing on the building sector, we formulate optimal investment in energy efficiency as a problem of wealth growth-rate maximisation under uncertainty, subject to the diminishing marginal utility of retrofitting. The resulting model provides an unambiguous answer to the question of how much, and at what point in time, consumers with given wealth dynamics and parameters should invest in energy-efficiency measures for their particular dwelling. We treat in detail two foundational wealth dynamics: consumers who solely earn a fixed income, and those whose wealth grows multiplicatively. The differences in decision-making between these cases is seen to be substantial, with the latter group exhibiting further significant heterogeneity. All of this has profound implications for the social planner: on the one hand, we show how he must work harder to influence wealthier consumers; on the other, the model provides a methodology for crafting highly targeted policy interventions. |
| Keywords: | the energy-efficiency gap,energetic building retrofits,diminishing marginal utility,investment under uncertainty,growth-rate maximisation,social planning,retrofit incentives |
| JEL: | D01 D04 D11 D15 G11 G51 O33 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:kitiip:56&r=all |
| By: | David Lowing (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | We consider multi-choice cooperative games with a permission tree structure. Multi-choice games are a generalization of a cooperative transferable utility games in which each player has several activity levels. In addition, a permission tree structure models a situation in which a player needs permission from another player to cooperate. In this framework, the influence of a permission structure on the possibility of cooperation may have several interpretations depending on the context. In this paper, we investigate several of these interpretations and introduce for each of them a new allocation rule that we axiomatically characterize. |
| Keywords: | Multi-choice games,Multi-choice Permission value,Permission (tree) structures Multi-choice games,Permission (tree) structures |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-03121514&r=all |
| By: | Loïc Berger (CNRS - Centre National de la Recherche Scientifique, IÉSEG School Of Management [Puteaux], EIEE - European Institute on Economics and the Environment, CMCC - Centro Euro-Mediterraneo per i Cambiamenti Climatici [Bologna]) |
| Abstract: | This paper reflects on the notion of partial ambiguity. Using a framework decomposing ambiguity into distinct layers of analysis, among which are risk and model uncertainty, and allowing for different attitudes toward these layers, I show that partial ambiguity may prove less desirable than full ambiguity, even under ambiguity aversion. This observation poses difficulties for interpreting the notion of partial ambiguity in relation to the partial information available to determine the potential compositions of an ambiguous urn. Two Ellsberg-style thought experiments are described to challenge the meaning of partial ambiguity further, and an alternative interpretation, based on a more ambiguous relation, is discussed. |
| Keywords: | Ambiguity,model uncertainty,smooth ambiguity aversion,Ellsberg paradox |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03158580&r=all |
| By: | Yun Kuen Cheung; Stefanos Leonardos; Georgios Piliouras |
| Abstract: | We study learning dynamics in distributed production economies such as blockchain mining, peer-to-peer file sharing and crowdsourcing. These economies can be modelled as multi-product Cournot competitions or all-pay auctions (Tullock contests) when individual firms have market power, or as Fisher markets with quasi-linear utilities when every firm has negligible influence on market outcomes. In the former case, we provide a formal proof that Gradient Ascent (GA) can be Li-Yorke chaotic for a step size as small as $\Theta(1/n)$, where $n$ is the number of firms. In stark contrast, for the Fisher market case, we derive a Proportional Response (PR) protocol that converges to market equilibrium. The positive results on the convergence of the PR dynamics are obtained in full generality, in the sense that they hold for Fisher markets with \emph{any} quasi-linear utility functions. Conversely, the chaos results for the GA dynamics are established even in the simplest possible setting of two firms and one good, and they hold for a wide range of price functions with different demand elasticities. Our findings suggest that by considering multi-agent interactions from a market rather than a game-theoretic perspective, we can formally derive natural learning protocols which are stable and converge to effective outcomes rather than being chaotic. |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2103.08529&r=all |
| By: | de la Croix, David (Université catholique de Louvain); Doepke, Matthias (Northwestern University) |
| Abstract: | A long-standing challenge for welfare economics is to develop welfare criteria that can be applied to allocations with different population levels. Such a criterion is essential to resolve the optimal population problem, i.e., the tradeoff between population size and the welfare of each person alive. A welfare criterion that speaks to this issue inherently requires evaluating the welfare of nonexistent people, because some people exist only in some allocations but not in others. To make progress, we consider the population problem in an environment where population is variable, but there is a fixed supply of souls, who may experience multiple incarnations over time. Rather than pondering the value of nonexistence, from the souls' perspective comparing larger or smaller populations merely involves valuing shorter or longer waits until the next incarnation. We argue that such comparisons are possible on the basis of introspection and lead to intuitive welfare criteria with attractive properties. We emphasize that one does not have to believe in reincarnation to accept the resulting criteria—rather, reincarnation serves as a metaphor to facilitate the necessary utility comparisons. |
| Keywords: | population ethics, repugnant conclusion, endogenous discounting, utilitarianism, reincarnation |
| JEL: | D63 H43 J11 Q56 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp14222&r=all |
| By: | Matteo M. Marini (Department of Economics and Management, University of Florence, Italy) |
| Abstract: | This paper is a meta-analysis of experimental studies dealing with the impact of incidental emotions on risky choices, so as to explain traditional heterogeneity of outcomes in the literature. After devising a standard search strategy and filtering out studies that do not comply with a list of eligibility criteria, we include 24 articles from which 109 observations are drawn at the treatment level. At this point, we code a set of moderator variables representing experimental protocols and adopt Hedges’s g as comparable metric. Subgroup analysis and metaregressions find causal impact of both sadness and fear on risk aversion, albeit to a small extent, as well as highly contrasting patterns depending on the nature of incentives offered in the experiments. The use of monetary incentives turns out to reduce data variability and affects information processing by making subjects more susceptible to emotions. When studies provide real stakes, our results also show that emotions lead to take more risks in individualist countries than in collectivist societies. We discuss possible interpretations of our findings. |
| Keywords: | meta-analysis, experimental design, emotions, risky decision making, monetary incentives |
| JEL: | C90 C91 D81 D91 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:jau:wpaper:2021/04&r=all |
| By: | Erwin Bulte; John List; Daan van Soest |
| Abstract: | Incomplete contracts are the rule rather than the exception, and any incentive scheme faces the risk of improving performance on incented aspects of a task at the detriment of performance on non-incented aspects. Recent research documents the effect of loss-framed versus gain-framed incentives on incentivized behavior, but how do such incentives affect overall performance? We explore potential trade-offs by conducting field experiments in an artificial "workplace". We explore two types of incentive spillovers: those contemporaneous to the incented task and those subsequent to the incented task. We report three main results. First, consonant with the extant literature, a loss aversion incentive induces greater effort on the incented task. Second, offsetting this productivity gain, we find that the quality of work decreases if quality is not specified in the incentive contract. Third, we find no evidence of harmful spillover effects to subsequent tasks; if anything, the loss aversion incentive induces more effort in subsequent tasks. Taken together, our results highlight that measuring and accounting for incentive spillovers are important when considering their overall impact. |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:feb:framed:00727&r=all |
| By: | Michael Hasler; Mariana Khapko; Roberto Marfè |
| Abstract: | This paper studies the impact of information processing and rational learning about economic fundamentals on the level and timing of risk premium in the cross-section of firms. Learning helps explain the level of the value premium, and why the term structure of risk premium is increasing for value firms and decreasing for growth firms. Moreover, learning yields an upward-sloping term structure of interest rates and a downward-sloping term structure of market risk premium, whereas the full information economy predicts the opposite shapes. Therefore, rational learning helps understand the level and timing of expected returns observed in the cross-section of risky and risk-free assets. |
| Keywords: | Asset Pricing, Rational Learning, Term Structures, Value and Growth Firms. |
| JEL: | D51 D53 D83 G12 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:622&r=all |
| By: | Stefan Lautenbacher |
| Abstract: | Based on a new survey question in a large and representative panel of German firms, this paper introduces a novel measure of managers’ subjective uncertainty. I compare this measure of business uncertainty to respondents’ business expectations and document a strong negative relationship. However, the link is much weaker in bad times, since uncertainty is then persistently high – even when expectations are favorable. I continue by investigating the relative importance of uncertainty and expectations for corporate decisions. Exploiting information on firms’ investment and labor reactions to the COVID-19 crisis, I do not find evidence that uncertainty induced “wait and see” behavior. However, a deterioration in managers’ expectations and in their assessment of their firms’ business situation predicts investment deferral and a reduction in employment. |
| Keywords: | Subjective uncertainty, expectations, firms, survey data, corporate decisions, business cycles |
| JEL: | C83 D22 D84 E32 E71 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ifowps:_349&r=all |
| By: | Li, Wenhui; Wilde, Christian |
| Abstract: | The pricing of an ambiguous asset, whose cash flow stream is uncertain, may be affected by three factors: the belief regarding the realization likelihood of cash flows, the subjective attitude towards risk, and the attitude towards ambiguity. While previous literature looks at the total price discount under ambiguity, this paper investigates with laboratory experiments how much effect each factor can induce. We apply both non-parametric and parametric methods to cleanly separate the belief effects, the risk premiums, and the ambiguity premiums from each other. Both methods lead to similar results: Overall, subjects have substantial ambiguity aversion, and ambiguity premiums account for the largest price deviation component when the degree of ambiguity is high. As information accumulates, ambiguity premiums decrease. We also find that beliefs do influence prices under ambiguity. This is not because beliefs are biased towards either good or bad scenarios per se, but because subjects display sticky belief updating as new information becomes available. The clear separation performed in this paper between belief and attitude also enables a more accurate estimation of the parameter of ambiguity aversion compared to previous studies, since the effect of beliefs is partialled out. Overall, we find empirically that both factors, belief and attitude towards ambiguity, are important factors in pricing under ambiguity. |
| Keywords: | ambiguity,belief estimation,belief effect,ambiguity premium,laboratory experiments |
| JEL: | D81 D83 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:311&r=all |
| By: | François Belle-Larant (LGI - Laboratoire Génie Industriel - CentraleSupélec - Université Paris-Saclay); Hugo Mauron (LGI - Laboratoire Génie Industriel - CentraleSupélec - Université Paris-Saclay); Pascal da Costa (LGI - Laboratoire Génie Industriel - CentraleSupélec - Université Paris-Saclay) |
| Abstract: | This article introduces within the DICE Model a new class of consumers with the political or philosophical opinion of "degrowth", so-called deep green consumers (DGC), whose discount rate will endogenously decrease with the economic growth. A new utility function is assumed, using the Ramsey equation, to compute the social discount rate (SDR) in this new way. New paths of consumption and greenhouse gases (GHGs) emissions thus arise for both this social rate time of pure preference and the absolute value of the elasticity of intertemporal substitution of the consumption. In this framework, the SDR is a decreasing function with respect to the share of DGC in the total population. The integral of intertemporal utility proves an increasing function with respect to it. This article assesses the impact of an increase in the share of DGC in the population and shows that, under a certain threshold of DGC around 40%, no significant difference in the temperature decrease before 2100 is found. Above this threshold, the trend of increasing temperatures is inverted, within a time frame of one century: A share of 50% of DGC shows a peak for temperature in 2120, with an increase of +3°C., below Nordhaus' optimal path. These assessments show that changes in public opinion, such as the emerging movement in favor of reduced material consumption, or even degrowth, could lead to significant effects in favor of the climate when reaching a certain threshold. This is due to the inertia of both the natural climate systems and capital investment, arguing for strong complementary economic policy measures to reduce GHGs emissions, in addition to preference changes. |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03146625&r=all |
| By: | Leiashvily, Paata |
| Abstract: | In this article, the problem of self-organization of economic processes in conditions of perfect competition, based on the interaction of individual and social economic values and market prices, is considered. On the basis of dialectical analysis, the deep internal unity of production and consumption, supply and demand, utility and costs, and other categories that determine the functional closedness and integrity of economic system as a necessary condition to understand the formation process of a macroeconomic order from microeconomic chaos is shown. A new understanding of market processes’ self-regulation mechanism and economic optimization on the methodological basis of dialectics is given. The proposed theoretical explanation of economic processes makes it possible to create more adequate applied economic models and develop an effective economic policy. |
| Keywords: | dialectics, self-regulation, equilibrium, economic value, market prices, optimality criteria |
| JEL: | A10 B40 D50 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:106791&r=all |
| By: | Axel Anderson (Department of Economics, Georgetown University); Lones Smith (Department of Economics, University of Wisconsin) |
| Abstract: | We create a general and tractable theory of increasing sorting in pairwise matching models with transferable utility — one that subsumes Becker (1973) as the extreme cases with most and least sorting. We first prove that the positive quadrant dependence order smartly measures increasing sorting, e.g. it rises in the correlation of matched partners. Our theory centers on synergy — the cross partial difference or derivative of match production. Notably, if synergy everywhere increases, sorting need not rise, but cannot fall. To rescue increasing sorting, we posit often met cross-sectional restrictions on match synergy. Our theory illuminates top economics sorting papers, affording quick proofs of their results and new insights. Synergy reflects basic economic forces, such as diminishing returns, moral hazard, insurance, and learning dynamics. Our proof develops and exploits new monotone comparative statics methods. The main proof proceeds by induction with finitely many types, and secures the continum type results by taking limits. Classification- C6, D2, D5, J1 |
| Keywords: | Sorting, comparative statics, matching, complementarity, single crossing aggregation, monotone methods |
| Date: | 2021–03–16 |
| URL: | http://d.repec.org/n?u=RePEc:geo:guwopa:gueconwpa~21-21-06&r=all |