nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2021‒06‒14
twelve papers chosen by
Alexander Harin
Modern University for the Humanities

  1. On the analytics of infinite game theory problems By Gambarova, Z.; Glycopantis, D.
  2. Optimal Patent Protection and Expected Utility Model: A Transition Economy Example By Niftiyev, Ibrahim
  3. Identifying Choice Correspondences By Elias Bouacida
  4. Taxation behind the veil of ignorance By Biung-Ghi Ju; Juan D. Moreno-Ternero
  5. Loss aversion in taste-based employee discrimination: Evidence from a choice experiment By Louis Lippens; Stijn Baert; Eva Derous
  6. Revisiting intertemporal elasticity of substitution in a sticky price model By Kilponen, Juha; Vilmunen, Jouko; Vähämaa, Oskari
  7. Optimal taxes on capital in the OLG model with uninsurable idiosyncratic income risk By Krueger, Dirk; Ludwig, Alexander; Villalvazo, Sergio
  8. Population Mobility Structural Analysis and Population Estimation Using a Quantitative Spatial Model By Wataru Takahashi
  9. Pragmatic Ambiguity and Rational Miscommunication By Toru Suzuki
  10. Deriving Equity Risk Premium Using Dividend Futures By Martin Casta
  11. Values in Welfare economics By Antoinette Baujard
  12. Social Roles By Avner Seror

  1. By: Gambarova, Z.; Glycopantis, D.
    Abstract: We consider zero-sum and a non zero-sum games of two players with generalized, not necessarily linear, utility functions and infinite, compact pure strategy spaces. Emphasis is given to comparisons with results obtained in mathematical theorems. The games chosen make specific points in relation to the conditions of the theorems. The idea of δ functions is exploited to construct mixed strategies. We interpret their significance in joining pure strategies and show the application in confirming NE. Uniqueness of NE is looked at. An issue is also how far an analogy can be drawn from the case of the finite matrix games. The usually discussed game theory problems are easy to analyze but they do not cover the whole range of possibilities.
    Keywords: Nash Equilibrium (NE); Infinite games; Compact set of strategies; Reaction functions; Dirac δ function; Mixed strategies; Quasi-concave utility function; Nash-von Neumman-Debreu-Fan-Glisberg theorems; multiple Nash equilibria; minimax theorem; saddle point; games with perfect recall; behavioural strategies
    Date: 2021
  2. By: Niftiyev, Ibrahim
    Abstract: This paper aims to critically appraise optimal patent protection using the expected utility model from the perspectives of governments to balance the motivation and social use of the intellectual property. In order to achieve this aim, the report has presented the working mechanism of governments towards patent protection; use of utility model by governments; past and present academic investigations on the topic; strategizing behavior of governments towards patents and as a brief example, a case of the transition economy. The expected utility model has provided an effective and efficient framework for the development of patent strategy by governments. The essay has noted that due to the differences between industries and their dynamics, it is expected that diverse patent regimes should be followed to balance the social utility and economic utility of the economic actor to engage in research and development.
    Keywords: Patent protection,expected utility,function,optimization,transition economy
    Date: 2021
  3. By: Elias Bouacida
    Abstract: We introduce a general method for identifying the sets of best alternatives of decision makers in each choice sets, i.e., their choice correspondences, experimentally. In contrast, most experiments force the choice of a single alternative in each choice set. The method allow decision makers to choose several alternatives, provide a small incentive for each alternative chosen, and then randomly select one for payment. We derive two conditions under which the method may recover the choice correspondence. First, when the incentive to choose several alternative becomes small. Second, we can at least partially identifies the choice correspondence, by obtaining supersets and subsets for each choice set. We illustrate the method with an experiment, in which subjects choose between four paid tasks. In the latter case, we can retrieve the full choice correspondence for 18% of subjects and bind it for another 40%. Using the limit result, we show that 40% of all observed choices can be rationalized by complete, reflexive and transitive preferences in the experiment, i.e., satisfy the Weak Axiom of Revealed Preferences – WARP hereafter. Weakening the classical model, incomplete preferences or just-noticeable difference preferences do not rationalize more choice correspondences. Going beyond, however, we show that complete, reflexive and transitive preferences with menu-dependent choices rationalize 96% of observed choices. Having elicited choice correspondences allows to conclude that indifference is widespread in the experiment. These results pave the way for exploring various behavioral models with a unified method.
    Date: 2021
  4. By: Biung-Ghi Ju (Department of Economics, Seoul National University); Juan D. Moreno-Ternero (Department of Economics, Universidad Pablo de Olavide;)
    Abstract: We explore the design of impartial tax schemes in a simple setup where agents’ incomes are completely determined by their inborn talents. Building on Harsanyi’s veil-of-ignorance approach, we conceptualize an impartial observer who chooses a tax scheme without know- ing her own preferences and the distribution of talents, and whose vNM preferences behind the veil obey Harsanyi’s principle of acceptance and are independent, in terms of utility-scale, of the distribution of talents. Our results in the resulting framework provide three main messages: (i) the veil of ignorance implies anonymity of tax schemes; (ii) the veil of ignorance generically rejects utilitarian tax schemes; (iii) the veil of ignorance endorses the (Rawlsian) leveling tax scheme.
    Keywords: veil of ignorance, impartiality, anonymity, leveling tax, utilitarianism
    JEL: D63 D71 H24
    Date: 2021
  5. By: Louis Lippens; Stijn Baert; Eva Derous (-)
    Abstract: Using a choice experiment, we test whether taste-based employee discrimination against ethnic minorities is susceptible to loss aversion. In line with empirical evidence from previous research, our results indicate that introducing a hypothetical wage penalty for discriminatory choice behaviour lowers discrimination and that higher penalties have a greater effect. Most notably, we find that the propensity to discriminate is significantly lower when this penalty is loss-framed rather than gain-framed. From a policy perspective, it could therefore be more effective to financially penalise taste-based discriminators than to incentivise them not to discriminate.
    Keywords: taste-based discrimination, employee discrimination, loss aversion, ethnicity
    Date: 2021–06
  6. By: Kilponen, Juha; Vilmunen, Jouko; Vähämaa, Oskari
    Abstract: Macroeconomic models typically assume additively separable preferences where consumption enters the utility function in a logarithmic form. This restriction implies that consumption growth is highly sensitive to movements in real interest rates, which in turn implies an unrealistically steep demand curve and intertemporal trade-off. We re-estimate the stylized New Keynesian Model with US data using King-Plosser-Rebelo (1988) preferences with and without habits and show that the equilibrium real interest rate elasticity of output is in the range of 0.05 − 0.20 in the US. Such low real interest rate elasticity is better in line with the empirical consumption Euler equation literature and implies relatively weak transmission of monetary policy to output and inflation.
    JEL: E32 E52 E21
    Date: 2021–06–09
  7. By: Krueger, Dirk; Ludwig, Alexander; Villalvazo, Sergio
    Abstract: We characterize the optimal linear tax on capital in an Overlapping Generations model with two period lived households facing uninsurable idiosyncratic labor income risk. The Ramsey government internalizes the general equilibrium effects of private precautionary saving on factor prices and taxes capital unless the weight on future generations in the social welfare function is sufficiently high. For logarithmic utility a complete analytical solution of the Ramsey problem exhibits an optimal aggregate saving rate that is independent of income risk, whereas the optimal time-invariant tax on capital implementing this saving rate is increasing in income risk. The optimal saving rate is constant along the transition and its sign depends on the magnitude of risk and on the Pareto weight of future generations. If the Ramsey tax rate that maximizes steady state utility is positive, then implementing this tax rate permanently induces a Pareto-improving transition even if the initial equilibrium capital stock is below the golden rule.
    Keywords: Idiosyncratic Risk,Taxation of Capital,Overlapping Generations,Precautionary Saving,Pecuniary Externalities
    JEL: H21 H31 E21
    Date: 2021
  8. By: Wataru Takahashi (Economist, Policy Research Institute, Ministry of Finance)
    Abstract: This article proposes a population forecasting using endogenous population model, which incorporates a spatial model considering the spatially heterogeneous feature of agents and the economy by employing quantitative spatial models. In this endogenous population model, agents migrate to maximize their utility. This model is estimated using the twostage estimation approach, which is extensively used in quantitative spatial literature. Estimated parameters are significant and almost consistent with the economic and demographic stylized facts. Using the parameters concerning migration and local utilities, we conduct projection analyses for 2015-2125 across all prefectures in Japan, which is now experiencing regionally asymmetric population decline. In the baseline projections, the population in less populated prefectures is mitigated slightly by introducing the young generation's migration behavior. Counterfactual analyses are then conducted to break down the factors of population decline in Japan. Among several factors, birth abandonments due to some constraints and slow productivity growth after 1995 turned out to have severely impacted demographics. The development of networks resulted in having negative impacts on demographics though they had positive impacts on the welfare of economic agents in many aspects.
    Keywords: endogenous population model, spatial economics, quantitative spatial economics, population mobility.
    JEL: C21 J61 R10 R12 R23 P25
  9. By: Toru Suzuki (University of Technology Sydney)
    Abstract: This paper provides a model of miscommunication in a common-interest setting. The speaker describes the state with a preexisting language to the decision-maker, whereas using a longer description is more costly. It is shown that, given any non-zero communication cost, any reasonably efficient equilibrium exhibits miscommunication caused by ambiguous descriptions whenever agents communicate across various occasions and their perceptions of occasions are imperfect but sufficiently accurate. Equilibrium miscommunication disappears when agents’ perceptions of occasions are too noisy, suggesting more accurate perceptions do not always reduce miscommunication. The model also provides insight into the miscommunication that triggered a well-known aircraft crash.
    Keywords: Miscommunication; common-interest communication; pragmatic ambiguity;economics and language
    JEL: D83
    Date: 2021–06–02
  10. By: Martin Casta
    Abstract: In this paper I present a simple stock price decomposition model using the dividend discount model and dividend futures. The main contribution of this paper is the use of dividend futures which represent the risk-adjusted expectations of future dividends. This allows for the calculation of the implied equity risk premium and the decomposition of stock price movements into individual components. Due to the use of daily market data, this method can take into account the structural changes associated with falling interest rates and the Covid-19 pandemic. I empirically show the risk premium development of the S&P 500 Index and Euro Stoxx 50 Index in the last decade.
    Keywords: Asset prices, dividend futures, risk premium
    JEL: G12 G41
    Date: 2020–05
  11. By: Antoinette Baujard (Univ Lyon, UJM Saint-Etienne, GATE UMR 5824, 42023 Saint-Etienne, France)
    Abstract: This chapter focuses on the inner rationale and consequences of four different archetypal positions regarding how ethical and political values are tackled in welfare economics. Welfare economics is standardly associated with the welfarist framework, for which social welfare is based on individual utility only. Beyond this, we distinguish the value-neutrality claim – for which ethical values should be and are out of the scope of welfare economics –, the value confinement ideal – for which ethical values are acceptable if they are minimal and consensual–, the transparency requirement – for which any ethical values may be acceptable in the welfare economics framework if explicit and formalized –, and the entanglement claim – which challenges the very possibility of demarcation between facts and values.
    Keywords: Welfare economics, facts and values, value judgement, welfarism, transparency, demarcation, normative and positive, neutrality
    JEL: B41 D60 D63
    Date: 2021
  12. By: Avner Seror (Aix-Marseille Univ, CNRS, AMSE, Marseille, France.)
    Abstract: In this paper, I introduce a workable dynamic utility model on the interplay between economic actions and social roles. I model both how economic actions are embedded in social roles, and how social roles reciprocally feed back into preferences and affect economic outcomes. I also consider a set of policy interventions aimed at breaking social roles when they deteriorate economic outcomes.
    Keywords: social roles, identity, endogenous preferences, gender, discrimination
    JEL: D1 D7 D9 H3 J15 J16 J7 Z1
    Date: 2021–05

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