nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2021‒04‒12
25 papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Are Policymakers Ambiguity Averse? By Loïc Berger; Valentina Bosetti
  2. Ambiguous Outcome Magnitude in Economic Decision Making with Low and High Monetary Stakes By Zbozinek, Tomislav Damir; Charpentier, Caroline Juliette; Qi, Song; mobbs, dean
  3. Changing Objectives of Firms and Managerial Preferences: A Review of Models in Microeconomics By Kumar B, Pradeep
  4. A comprehensive revealed preference approach to approximate utility maximisation and non-transitive indifferences By Pawel Dziewulski
  5. Influence of risk tolerance on long-term investments: A Malliavin calculus approach By Hyungbin Park
  6. Loss Aversion, Moral Hazard, and Stochastic Contracts By Ho, Hoa
  7. Local Utility and Multivariate Risk Aversion By Arthur Charpentier; Alfred Galichon; Marc Henry
  8. The propensity to adaptation under the new era of climate changes By Ary José A. de Souza-Jr.; Flávio Terto
  9. Dual theory of choice with multivariate risks By Alfred Galichon; Marc Henry
  10. Matching in Closed-Form: Equilibrium, Identification, and Comparative Statics By Raicho Bojilov; Alfred Galichon
  11. A lattice approach to the Beta distribution induced by stochastic dominance: Theory and applications By Yann Braouezec; John Cagnol
  12. Behavioral Economics Approach to Interpretable Deep Image Classification. Rationally Inattentive Utility Maximization Explains Deep Image Classification By Kunal Pattanayak; Vikram Krishnamurthy
  13. Uncertainty, sentiments and time-varying risk premia By Berardi, Michele
  14. Cost-Utility Analysis of a Dolutegravir-Based Versus Low-Dose Efavirenz-Based Regimen for the Initial Treatment of HIV-Infected Patients in Cameroon (NAMSAL ANRS 12313 Trial) By Marwân-Al-Qays Bousmah; Marie Nishimwe; Tamara Tovar-Sanchez; Martial Lantche Wandji; Mireille Mpoudi-Etame; Gwenaëlle Maradan; Pierrette Omgba Bassega; Marie Varloteaux; Alice Montoyo; Charles Kouanfack; Eric Delaporte; Sylvie Boyer
  15. Rationality and Emotions: A Model of Inner Games and Ego Identity By Liu, Fen
  16. Rethinking the Role of the Representativeness Heuristic in Macroeconomics and Finance Theory By Roman Frydman; Morten Nyboe Tabor
  17. A Critical Perspective on the Conceptualization of Risk in Behavioral and Experimental Finance By Felix Holzmeister; Christop Huber; Stefan Palan
  18. A Semi-analytical Solution to Consumption and International Asset Allocation Problem By Bolorsuvd BATBOLD; Kentaro Kikuchi; Koji Kusuda
  19. Hypothetical bias in stated choice experiments: Part I. Integrative synthesis of empirical evidence and conceptualisation of external validity By Milad Haghani; Michiel C. J. Bliemer; John M. Rose; Harmen Oppewal; Emily Lancsar
  20. Do MTurkers Exhibit Myopic Loss Aversion? By Rene Schwaiger; Laura Hueber
  21. Empirical Welfare Maximization with Constraints By Liyang Sun
  22. Cursed yet Satisfied Agents By Yiling Chen; Alon Eden; Juntao Wang
  23. Matching Function Equilibria with Partial Assignment: Existence, Uniqueness and Estimation By Liang Chen; Eugene Choo; Alfred Galichon; Simon Weber
  24. When to Quit Gambling, if You Must! By Sang Hu; Jan Obloj; Xun Yu Zhou
  25. Identification and Estimation in Many-to-one Two-sided Matching without Transfers By YingHua He; Shruti Sinha; Xiaoting Sun

  1. 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]); Valentina Bosetti (Bocconi University [Milan, Italy], EIEE - European Institute on Economics and the Environment, CMCC - Centro Euro-Mediterraneo per i Cambiamenti Climatici [Bologna])
    Abstract: We investigate the ambiguity preferences of a unique sample of real-life policymakers at the Paris UN climate conference (COP21). We find that policymakers are generally ambiguity averse. Using a simple design, we are moreover able to show that these preferences are not necessarily due to an irrational behavior, but rather to intrinsic preferences over unknown probabilities. Exploring the heterogeneity within our sample, we also show that the country of origin and the degree of quantitative sophistication affect policymakers' attitudes towards compound risk, but not towards ambiguity. Robustness results are obtained in a lab experiment with a sample of university students.
    Keywords: Ambiguity aversion,experiment,policymakers,compound lotteries,nonexpected utility,subjective probabilities
    Date: 2020–02–01
  2. By: Zbozinek, Tomislav Damir (California Institute of Technology); Charpentier, Caroline Juliette; Qi, Song; mobbs, dean
    Abstract: Most of life’s decisions involve risk and uncertainty regarding whether reward or loss will follow. A major approach to understanding decision-making under these circumstances comes from economics research. While many economic decision-making experiments have focused on gains/losses and risk (<100% probability of a given outcome), relatively few have studied ambiguity (i.e., uncertainty about the degree of risk or magnitude of gains/losses). Within ambiguity, most studies have focused on ambiguous risk (uncertainty regarding likelihood of outcomes), but few studies have investigated ambiguous outcome magnitude (i.e., uncertainty regarding how small/large the gain/loss will be). In the present report, we investigated the effects of ambiguous outcome magnitude, risk, and gains/losses in an economic decision-making task with low stakes (Study 1; $3.60-$5.70; N = 367) and high stakes (Study 2; $6-$48; N = 210) using the same participants in Study 2 as in Study 1. We conducted computational modeling to determine individuals’ preferences/aversions for ambiguous outcome magnitudes, risk, and gains/losses. Our results show that increasing stakes increases ambiguous gain aversion, unambiguous loss aversion, and unambiguous risk aversion, but increases ambiguous loss preference. These results suggest that as stakes increase, people tend to avoid uncertainty and loss in most domains but prefer ambiguous loss.
    Date: 2021–04–02
  3. By: Kumar B, Pradeep
    Abstract: Theoretically, producer behavior models postulate that firms have had different objectives ranging from profit maximization to setting aspirational levels. The assumption of objective of profit maximization was shaped on the basis of the rationality principles which has lost relevance with the coming of the principle of behavioral economic in recent time. The present paper intends to throw some light on changes that have been made in the objective of firms over years and attempts to review some models emphasizing managerial utility as the core objective of firms.
    Keywords: Profit Maximization, Sales Maximization, Managerial Utility Function, Managerial Discretionary Powers, Slacks and Salaries, Behavioral Economics
    JEL: D01
    Date: 2021–07–06
  4. By: Pawel Dziewulski (University of Sussex)
    Abstract: We develop a comprehensive revealed preference method for studying approximate utility maximisation, where an alternative is selected from a menu only if its utility is not significantly lower than that of any other available option. We show that this model is characterised by choices that violate transitivity of indifferences, but preserve transitivity of the revealed strict preferences. More importantly, although the individual may fail to maximise their utility exactly, it is possible to recover their true preferences from the observable data, make out-of-sample predictions and welfare comparisons. Our results require minimal assumptions on the empirical framework and are applicable, amongst others, to the study of choices over consumption bundles, state-contingent consumption, and lotteries.
    Keywords: approximate utility maximisation, revealed preference analysis, nontransitive indifferences, recoverability of preferences, interval order
    JEL: D11 D81 D91
    Date: 2021–03
  5. By: Hyungbin Park
    Abstract: This study investigates the influence of risk tolerance on the expected utility in the long run. We estimate the extent to which the expected utility of optimal portfolios is affected by small changes in the risk tolerance. For this purpose, we adopt the Malliavin calculus method and the Hansen--Scheinkman decomposition, through which the expected utility is expressed in terms of the eigenvalues and eigenfunctions of an operator. We conclude that the influence of risk aversion on the expected utility is determined by these eigenvalues and eigenfunctions in the long run.
    Date: 2021–04
  6. By: Ho, Hoa
    Abstract: I examine whether stochastic contracts benefit the principal in the setting of moral hazard and loss aversion. Incorporating that the agent is expectation-based loss averse and allowing the principal to add noise to performance signals, I find that stochastic contracts reduce the principal's implementation cost in comparison with deterministic contracts. Surprisingly, if performance signals are highly informative about the agent's action, stochastic contracts strictly dominate the optimal deterministic contract for almost any degree of loss aversion. The optimal stochastic contract pays a high wage whenever the principal observes good performance signals, while upon observing bad performance signals it adds a lottery that gives either the high wage or a low wage that serves as a harsh penalty to the agent. In the general case when the agent is both risk and loss averse, I show that if a penalty wage (i.e., a wage level at which the agent feels a substantial disutility) exists, the first best can be approximated closely but not attained. The findings have an important implication for designing contracts for loss-averse agents: the principal should insure the agent against wage uncertainty by employing stochastic contracts that increase the probability of a high wage.
    Keywords: loss aversion; moral hazard; stochastic contracts; reference-dependent preferences
    Date: 2021–03–15
  7. By: Arthur Charpentier; Alfred Galichon; Marc Henry
    Abstract: We revisit Machina's local utility as a tool to analyze attitudes to multivariate risks. We show that for non-expected utility maximizers choosing between multivariate prospects, aversion to multivariate mean preserving increases in risk is equivalent to the concavity of the local utility functions, thereby generalizing Machina's result in Machina (1982). To analyze comparative risk attitudes within the multivariate extension of rank dependent expected utility of Galichon and Henry (2011), we extend Quiggin's monotone mean and utility preserving increases in risk and show that the useful characterization given in Landsberger and Meilijson (1994) still holds in the multivariate case.
    Date: 2021–02
  8. By: Ary José A. de Souza-Jr.; Flávio Terto
    Abstract: Decision utility or experienced utility: which one of them helps us better understand how it will occur the process to the adaptation of behavior’s consumer regarding the impact of climate change? This paper argues how each one of the aforementioned concepts most may affect the consumer’s routine as “decision-makers”, within the context that disturbances and scarcity must narrow their available options. For this, we use the individual’s choice reported in the 8th wave of European Social Survey, based on the choice-oriented perspective, which establishes a link between well-being and the propensity to adapt within this scenario. For this, an ordered logit model is applied upon environmental and socio-economic variables. In the end, our findings are consistent with a strong presence of rationality in the decision process towards adaptation.
    Date: 2021–03
  9. By: Alfred Galichon; Marc Henry
    Abstract: We propose a multivariate extension of Yaari's dual theory of choice under risk. We show that a decision maker with a preference relation on multidimensional prospects that preserves first order stochastic dominance and satisfies comonotonic independence behaves as if evaluating prospects using a weighted sum of quantiles. Both the notions of quantiles and of comonotonicity are extended to the multivariate framework using optimal transportation maps. Finally, risk averse decision makers are characterized within this framework and their local utility functions are derived. Applications to the measurement of multi-attribute inequality are also discussed.
    Date: 2021–02
  10. By: Raicho Bojilov; Alfred Galichon
    Abstract: This paper provides closed-form formulas for a multidimensional two-sided matching problem with transferable utility and heterogeneity in tastes. When the matching surplus is quadratic, the marginal distributions of the characteristics are normal, and when the heterogeneity in tastes is of the continuous logit type, as in Choo and Siow (2006), we show that the optimal matching distribution is also jointly normal and can be computed in closed form from the model primitives. Conversely, the quadratic surplus function can be identified from the optimal matching distribution, also in closed-form. The closed-form formulas make it computationally easy to solve problems with even a very large number of matches and allow for quantitative predictions about the evolution of the solution as the technology and the characteristics of the matching populations change.
    Date: 2021–02
  11. By: Yann Braouezec; John Cagnol
    Abstract: We provide a comprehensive analysis of the two-parameter Beta distributions seen from the perspective of second-order stochastic dominance. By changing its parameters through a bijective mapping, we work with a bounded subset D instead of an unbounded plane. We show that a mean-preserving spread is equivalent to an increase of the variance, which means that higher moments are irrelevant to compare the riskiness of Beta distributions. We then derive the lattice structure induced by second-order stochastic dominance, which is feasible thanks to the topological closure of D. Finally, we consider a standard (expected-utility based) portfolio optimization problem in which its inputs are the parameters of the Beta distribution. We explicitly characterize the subset of D for which the optimal solution consists of investing 100% of the wealth in the risky asset and we provide an exhaustive numerical analysis of this optimal solution through (color-coded) graphs.
    Date: 2021–04
  12. By: Kunal Pattanayak; Vikram Krishnamurthy
    Abstract: Are deep convolutional neural networks (CNNs) for image classification consistent with utility maximization behavior with information acquisition costs? This paper demonstrates the remarkable result that a deep CNN behaves equivalently (in terms of necessary and sufficient conditions) to a rationally inattentive utility maximizer, a model extensively used in behavioral economics to explain human decision making. This implies that a deep CNN has a parsimonious representation in terms of simple intuitive human-like decision parameters, namely, a utility function and an information acquisition cost. Also the reconstructed utility function that rationalizes the decisions of the deep CNNs, yields a useful preference order amongst the image classes (hypotheses).
    Date: 2021–02
  13. By: Berardi, Michele
    Abstract: Why are stock prices much more volatile than the underlying dividends? The excess volatility of prices can in principle be attributed to two different causes: time-varying discount rates for expected future dividends, arising from variation in risk premia; or the irrational exuberance of investors, bidding prices up and down even in the absence of changes in the underlying value of the asset. No consensus has so far emerged among economists as to the prevalence of one or the other source of price variation. I propose in this paper a novel way to approach this problem, by identifying changes in the uncertainty faced by investors regarding the fundamental value of an asset and exploiting the different response in prices that such changes in uncertainty would generate through sentiments or risk premia. I then apply this framework to the S&P 500 index from 1872 till 2019: the positive correlation found between uncertainty and prices (or, equivalently, the negative correlation between uncertainty and implied risk premia) is not compatible with rational investors' behavior and suggests instead the presence of a significant sentiments component in stock prices.
    Keywords: uncertainty, risk premium, sentiments; information, financial markets.
    JEL: D81 D83 G12 G14
    Date: 2021–02–18
  14. By: Marwân-Al-Qays Bousmah (SESSTIM - U1252 INSERM - Aix Marseille Univ - UMR 259 IRD - Sciences Economiques et Sociales de la Santé & Traitement de l'Information Médicale - IRD - Institut de Recherche pour le Développement - AMU - Aix Marseille Université - INSERM - Institut National de la Santé et de la Recherche Médicale); Marie Nishimwe (SESSTIM - U1252 INSERM - Aix Marseille Univ - UMR 259 IRD - Sciences Economiques et Sociales de la Santé & Traitement de l'Information Médicale - IRD - Institut de Recherche pour le Développement - AMU - Aix Marseille Université - INSERM - Institut National de la Santé et de la Recherche Médicale, ORS PACA - Observatoire régional de la santé Provence-Alpes-Côte d'Azur [Marseille]); Tamara Tovar-Sanchez (TransVIHMI - Recherches Translationnelles sur le VIH et les maladies infectieuses endémiques er émergentes - UM1 - Université Montpellier 1 - IRD - Institut de Recherche pour le Développement - UCAD - Université Cheikh Anta Diop [Dakar, Sénégal] - Universtié Yaoundé 1 [Cameroun] - INSERM - Institut National de la Santé et de la Recherche Médicale - UM - Université de Montpellier, CHRU Montpellier - Centre Hospitalier Régional Universitaire [Montpellier]); Martial Lantche Wandji (ANRS - Agence Nationale de Recherches sur le Sida et les Hépatites Virales, Hôpital Central de Yaoundé [Yaoundé]); Mireille Mpoudi-Etame (Hôpital Militaire de Yaoundé - Partenaires INRAE); Gwenaëlle Maradan (ORS PACA - Observatoire régional de la santé Provence-Alpes-Côte d'Azur [Marseille]); Pierrette Omgba Bassega (Hôpital de la Cité Verte [Yaoundé]); Marie Varloteaux (ANRS - Agence Nationale de Recherches sur le Sida et les Hépatites Virales, Hôpital Central de Yaoundé [Yaoundé]); Alice Montoyo (ANRS - Agence Nationale de Recherches sur le Sida et les Hépatites Virales); Charles Kouanfack (ANRS - Agence Nationale de Recherches sur le Sida et les Hépatites Virales, Hôpital Central de Yaoundé [Yaoundé], Université de Dshang); Eric Delaporte (TransVIHMI - Recherches Translationnelles sur le VIH et les maladies infectieuses endémiques er émergentes - UM1 - Université Montpellier 1 - IRD - Institut de Recherche pour le Développement - UCAD - Université Cheikh Anta Diop [Dakar, Sénégal] - Universtié Yaoundé 1 [Cameroun] - INSERM - Institut National de la Santé et de la Recherche Médicale - UM - Université de Montpellier, CHRU Montpellier - Centre Hospitalier Régional Universitaire [Montpellier]); Sylvie Boyer (SESSTIM - U1252 INSERM - Aix Marseille Univ - UMR 259 IRD - Sciences Economiques et Sociales de la Santé & Traitement de l'Information Médicale - IRD - Institut de Recherche pour le Développement - AMU - Aix Marseille Université - INSERM - Institut National de la Santé et de la Recherche Médicale)
    Abstract: Objectives: Evidence comparing the economic and patient values of the World Health Organization's preferred (dolutegravir 50 mg [DTG]-based) and alternative (low-dose [400 mg] efavirenz [EFV400]-based) first-line antiretroviral regimens is limited. We compared patient-reported outcomes (PROs), costs, and the cost-utility of DTG- versus EFV400-based regimens in treatment-naive HIV-1 adults in the randomised NAMSAL ANRS 12313 trial in Yaoundé, Cameroon. Methods: We used clinical data, PROs, and health resource use data collected in the trial's first 96 weeks (2016–2019). Quality-adjusted life-years (QALYs) were computed using utility scores obtained from the 12-item Short Form (SF-12) generic health scale. Other PROs included perceived symptoms, depression, anxiety, and stress. In the 96-week base-case analysis, we estimated the unadjusted and multivariate-adjusted (1) mean costs (in US$, 2016 values) and QALYs/patient, (2) incremental costs and QALYs/patient, and (3) net health benefit (NHB). Outcomes were extrapolated over 5 and 10 years. Uncertainty was assessed using the cost-effectiveness acceptability curve and scenario and cost-effective price threshold analyses.
    Date: 2021
  15. By: Liu, Fen
    Abstract: This paper develops a framework of Inner Games with Ego Identity to discuss an individual’s rationality and emotions in decision making. Following previous efforts of taking psychological insights into economics, this paper dives into the multi-faceted human psychology and proposes a new framework of the decision maker’s Inner Games with Ego Identity in the context of a relationship, and integrates the components of beliefs about oneself and the other one in a relationship into the structure. Moreover, I assume that individuals are motivated mainly by their Ego Identity other than by direct pleasure from consumption, and the utility is derived from the inner state at the moment of decision making. As an application, I define and understand emotions in the framework, such as anger, guilt, and disappointment. For example, I distinguish five types of anger, such as healthy anger to protect one’s personal boundary, and anger to threaten others for some purpose. I end with a discussion of several directions for future research.
    Keywords: Bounded Rationality; Full Rationality; Psychological Game; Emotion
    JEL: C79 D03
    Date: 2021–01–05
  16. By: Roman Frydman (Department of Economics, New York University); Morten Nyboe Tabor (Institute for New Economic Thinking (INET))
    Abstract: We propose a novel interpretation and formalization of Kahneman and Tversky's findings in the Linda experiment which implies that subjects are rational in the sense of Muth's hypothesis and provides an approach to specifying rational assessment of uncertainty in macroeconomic models. Behavioral-finance theorists have appealed to Kahneman and Tversky's findings as an empirical foundation for a general approach replacing rational expectations. We show that behavioral models' specifications of participants' irrational forecasts and predictable errors are incompatible with Kahneman and Tversky's findings. Our interpretation of Kahneman and Tversky's findings is supportive of Lucas's compelling critique of inconsistent macroeconomic models.
    Keywords: Uncertainty in Economic Models; Kahneman and Tversky's Experimental Findings; Behavioral Finance; Muth's Hypothesis; REH.
    JEL: B41 D80 D81 D91 E71 G41
    Date: 2020–12–14
  17. By: Felix Holzmeister; Christop Huber; Stefan Palan
    Abstract: Risk is one of the key aspects in financial decision-making and therefore an integral part of the behavioral economics and finance literature. Focusing on the conceptualization of the term "risk", which researchers have addressed from numerous angles, this comment aims to offer a critical perspective on the interactions between risk preferences (a latent trait), risk perceptions (how individuals judge whether something is risky), and risk-taking behavior as distinct concepts, and hence to guide future research on (individual-level) decision-making processes in this direction.
    Keywords: risk-taking behavior, risk preferences, risk perception
    JEL: D81 D91 G41
    Date: 2021–11
  18. By: Bolorsuvd BATBOLD; Kentaro Kikuchi; Koji Kusuda (Faculty of Economics, Shiga University)
    Abstract: We consider a finite continuous-time optimal consumption and in-ternational asset allocation problem for an agent with CRRA utility, assuming a quadratic factor international security market model in which, latent factors are constituted of global economy factors and currency specific factors. It is not generally straightforward to find an analytical solution to the partial differential equation (PDE, hereafter) for the agent's indirect utility function, since a non-homogeneous term appears in the PDE. We apply a method of Liu [11] and Batbold et al. [4] to the PDE, and derive a semi-analytical solution. In the optimal investment ratio based on the solution, the market price of currency specific risk, the disparities between domestic and foreign market prices of global economy risk, and the disparities between domestic and for-eign market prices of currency specific risk appear.
  19. By: Milad Haghani; Michiel C. J. Bliemer; John M. Rose; Harmen Oppewal; Emily Lancsar
    Abstract: The notion of hypothetical bias (HB) constitutes, arguably, the most fundamental issue in relation to the use of hypothetical survey methods. Whether or to what extent choices of survey participants and subsequent inferred estimates translate to real-world settings continues to be debated. While HB has been extensively studied in the broader context of contingent valuation, it is much less understood in relation to choice experiments (CE). This paper reviews the empirical evidence for HB in CE in various fields of applied economics and presents an integrative framework for how HB relates to external validity. Results suggest mixed evidence on the prevalence, extent and direction of HB as well as considerable context and measurement dependency. While HB is found to be an undeniable issue when conducting CEs, the empirical evidence on HB does not render CEs unable to represent real-world preferences. While health-related choice experiments often find negligible degrees of HB, experiments in consumer behaviour and transport domains suggest that significant degrees of HB are ubiquitous. Assessments of bias in environmental valuation studies provide mixed evidence. Also, across these disciplines many studies display HB in their total willingness to pay estimates and opt-in rates but not in their hypothetical marginal rates of substitution (subject to scale correction). Further, recent findings in psychology and brain imaging studies suggest neurocognitive mechanisms underlying HB that may explain some of the discrepancies and unexpected findings in the mainstream CE literature. The review also observes how the variety of operational definitions of HB prohibits consistent measurement of HB in CE. The paper further identifies major sources of HB and possible moderating factors. Finally, it explains how HB represents one component of the wider concept of external validity.
    Date: 2021–02
  20. By: Rene Schwaiger; Laura Hueber
    Abstract: We present results from a highly powered online experiment with 937 participants on Amazon Mechanical Turk (MTurk) that examined whether MTurkers exhibit myopic loss aversion (MLA). The experiment consisted of measuring MLA-compliant behavior in two between-subjects treatments that differed only regarding the risk profile of the risky asset employed. We found no statistically significant evidence of MLA-compliant behavior among MTurkers in both treatments.
    Keywords: online experiment, myopic loss aversion, risk, mturk
    JEL: G10 G11 G41
    Date: 2021–12
  21. By: Liyang Sun
    Abstract: When designing eligibility criteria for welfare programs, policymakers naturally want to target the individuals who will benefit the most. This paper proposes two new econometric approaches to selecting an optimal eligibility criterion when individuals' costs to the program are unknown and need to be estimated. One is designed to achieve the highest benefit possible while satisfying a budget constraint with high probability. The other is designed to optimally trade off the benefit and the cost from violating the budget constraint. The setting I consider extends the previous literature on Empirical Welfare Maximization by allowing for uncertainty in estimating the budget needed to implement the criterion, in addition to its benefit. Consequently, my approaches improve the existing approach as they can be applied to settings with imperfect take-up or varying program needs. I illustrate my approaches empirically by deriving an optimal budget-constrained Medicaid expansion in the US.
    Date: 2021–03
  22. By: Yiling Chen; Alon Eden; Juntao Wang
    Abstract: In real life auctions, a widely observed phenomenon is the winner's curse -- the winner's high bid implies that the winner often over-estimates the value of the good for sale, resulting in an incurred negative utility. The seminal work of Eyster and Rabin [Econometrica'05] introduced a behavioral model aimed to explain this observed anomaly. We term agents who display this bias "cursed agents". We adopt their model in the interdependent value setting, and aim to devise mechanisms that prevent the cursed agents from obtaining negative utility. We design mechanisms that are cursed ex-post IC, that is, incentivize agents to bid their true signal even though they are cursed, while ensuring that the outcome is individually rational -- the price the agents pay is no more than the agents' true value. Since the agents might over-estimate the good's value, such mechanisms might require the seller to make positive transfers to the agents to prevent agents from over-paying. For revenue maximization, we give the optimal deterministic and anonymous mechanism. For welfare maximization, we require ex-post budget balance (EPBB), as positive transfers might lead to negative revenue. We propose a masking operation that takes any deterministic mechanism, and imposes that the seller would not make positive transfers, enforcing EPBB. We show that in typical settings, EPBB implies that the mechanism cannot make any positive transfers, implying that applying the masking operation on the fully efficient mechanism results in a socially optimal EPBB mechanism. This further implies that if the valuation function is the maximum of agents' signals, the optimal EPBB mechanism obtains zero welfare. In contrast, we show that for sum-concave valuations, which include weighted-sum valuations and l_p-norms, the welfare optimal EPBB mechanism obtains half of the optimal welfare as the number of agents grows large.
    Date: 2021–04
  23. By: Liang Chen; Eugene Choo; Alfred Galichon; Simon Weber
    Abstract: In this paper, we argue that models coming from a variety of fields share a common structure that we call matching function equilibria with partial assignment. This structure revolves around an aggregate matching function and a system of nonlinear equations. This encompasses search and matching models, matching models with transferable, non-transferable and imperfectly transferable utility, and matching with peer effects. We provide a proof of existence and uniqueness of an equilibrium as well as an efficient algorithm to compute it. We show how to estimate parametric versions of these models by maximum likelihood. We also propose an approach to construct counterfactuals without estimating the matching functions for a subclass of models. We illustrate our estimation approach by analyzing the impact of the elimination of the Social Security Student Benefit Program in 1982 on the marriage market in the United States.
    Date: 2021–02
  24. By: Sang Hu; Jan Obloj; Xun Yu Zhou
    Abstract: We develop an approach to solve Barberis (2012)'s casino gambling model in which a gambler whose preferences are specified by the cumulative prospect theory (CPT) must decide when to stop gambling by a prescribed deadline. We assume that the gambler can assist their decision using an independent randomization, and explain why it is a reasonable assumption. The problem is inherently time-inconsistent due to the probability weighting in CPT, and we study both precommitted and naive stopping strategies. We turn the original problem into a computationally tractable mathematical program, based on which we derive an optimal precommitted rule which is randomized and Markovian. The analytical treatment enables us to make several predictions regarding a gambler's behavior, including that with randomization they may enter the casino even when allowed to play only once, that whether they will play longer once they are granted more bets depends on whether they are in a gain or at a loss, and that it is prevalent that a naivite never stops loss.
    Date: 2021–02
  25. By: YingHua He; Shruti Sinha; Xiaoting Sun
    Abstract: In a setting of many-to-one two-sided matching with non-transferable utilities, e.g., college admissions, we study conditions under which preferences of both sides are identified with data on one single market. The main challenge is that every agent's actual choice set is unobservable to the researcher. Assuming that the observed matching is stable, we show nonparametric and semiparametric identification of preferences of both sides under appropriate exclusion restrictions. Our identification arguments are constructive and thus directly provide a semiparametric estimator. In Monte Carlo simulations, the estimator can perform well but suffers from the curse of dimensionality. We thus adopt a parametric model and estimate it by a Bayesian approach with a Gibbs sampler, which works well in simulations. Finally, we apply our method to school admissions in Chile and conduct a counterfactual analysis of an affirmative action policy.
    Date: 2021–04

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