
on Utility Models and Prospect Theory 
By:  Daijiro Kawanaka (Graduate School of Economics, Osaka University) 
Abstract:  In the existing axiomatic models of inequity aversion, players have linear payoff functions, so they can predict that a dictator chooses only a completely selfish or completely fair offer in dictator games. However, experimental literature documents that a significantly amount of dictators offers 2030% of the total pie to the passive opponent. This note, in contrast, axiomatizes inequity averse representation with general payoff function, so that we can explain such interior choices. 
Keywords:  Inequality aversion under risk, Maxmin expected utility, Social preferences 
JEL:  C72 D71 D81 
Date:  2021–06 
URL:  http://d.repec.org/n?u=RePEc:osk:wpaper:2109&r= 
By:  Anne G. Balter; Nikolaus Schweizer 
Abstract:  We study the problem of a planner who resolves riskreturn tradeoffs  like financial investment decisions  on behalf of a collective of agents with heterogeneous risk preferences. The planner's objective is a twostage utility functional where an outer utility function is applied to the distribution of the agents' certainty equivalents from a given decision. Assuming lognormal risks and heterogeneous power utility preferences for the agents, we characterize optimal behavior in a setting where the planner can let each agent choose between different options from a fixed menu of possible decisions, leading to a grouping of the agents by risk preferences. These optimal decision menus are derived first for the case where the planner knows the distribution of preferences exactly and then for a case where he faces uncertainty about this distribution, only having access to upper and lower bounds on agents' relative risk aversion. Finally, we provide tight bounds on the welfare loss from offering a finite menu of choices rather than fully personalized decisions. 
Date:  2021–06 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2106.13059&r= 
By:  Dong, Xueqi 
Abstract:  This note studies the implication of the general notion of uncertainty aversion (Schmeidler 1989) on the problem of portfolio choice, which involves allocating the proportions of fixed capital to several assets. We prove that if an investor is both risk averse and uncertainty averse, then preference in a portfolio space is convex. This result means that the convexity in a portfolio choice problem can be guaranteed without restricting preference representation to a particular functional form. 
Keywords:  Convexity, Portfolio Choice, Ambiguity, Uncertainty Aversion, Risk Aversion 
JEL:  D8 
Date:  2021–06–11 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:108264&r= 
By:  MarcArthur Diaye (CES  Centre d'économie de la Sorbonne  UP1  Université Paris 1 PanthéonSorbonne  CNRS  Centre National de la Recherche Scientifique); André Lapidus (PHARE  Philosophie, Histoire et Analyse des Représentations Économiques  UP1  Université Paris 1 PanthéonSorbonne); Christian Schmidt (PHARE  Philosophie, Histoire et Analyse des Représentations Économiques  UP1  Université Paris 1 PanthéonSorbonne) 
Abstract:  This paper aims at restating, in a decision theory framework, the results of some signicant contributions of the literature on probability discounting that followed the publication of the pioneering article by Rachlin et al. (1991). We provide a restatement of probability discounting in terms of rankdependent utility, in which the utilities of the outcomes of nissues lotteries are weighted by probabilities transformed after their transposition into timedelays. This formalism makes the typical cases of rationality in time and in risk mutually exclusive, but allows looser types of rationality. The resulting attitude toward probability and toward risk are then determined in relation to the values of the two parameters involved in the procedure of probability discounting. 
Keywords:  time discounting,Probability discounting,logarithmic time perception,rankdependent utility,rationality,attitude toward probabilities,attitude toward risk 
Date:  2021–06–10 
URL:  http://d.repec.org/n?u=RePEc:hal:cesptp:hal03256606&r= 
By:  Fink Simonsen, Nicolai (University of Southern Denmark, DaCHE  Danish Centre for Health Economics); Kjær, Trine (University of Southern Denmark, DaCHE  Danish Centre for Health Economics) 
Abstract:  It is standard practice in the literature to assume that an individual’s marginal utility of consumption is independent of health status. If this assumption is not met, it could have important implications for welfare economic analyses. The aim of this paper is to provide new, more comprehensive empirical evidence of state dependence following the approach used by Finkelstein et al. (2013). We use a rich combination of longitudinal survey data and administrative register data. Survey data were obtained from the Survey of Health, Ageing and Retirement in Europe (SHARE) and combined with data from the comprehensive Danish registers, including individual income data and data on health care utilisation based on the universal ICD10 classification system. Utility is measured in terms of subjective wellbeing attained from the SHARE survey. To further increase the power of our sample, we used a stateoftheart prediction algorithm to enrich the register data with information on subjective wellbeing. With this approach, this paper also makes a general methodological contribution on the use of prediction models for data enrichment and imputation. We define a reduced form equation in which individual subjective wellbeing is regressed according to income and health with an interaction effect capturing state dependence. Our results show evidence of negative state dependence. From our baseline regression, the estimated magnitude suggests that marginal utility of consumption decreases by 14.6% when an individual becomes sick. The results are robust to different levels of risk aversion and to assumptions regarding the mapping of the latent utility onto observed utility. 
Keywords:  utility; health risk; consumption 
JEL:  C53 D12 I10 J14 
Date:  2021–06–15 
URL:  http://d.repec.org/n?u=RePEc:hhs:sduhec:2021_002&r= 
By:  Alfred Galichon; Bernard Salani\'e 
Abstract:  We investigate a model of onetoone matching with transferable utility and general unobserved heterogeneity. Under a separability assumption that generalizes Choo and Siow (2006), we first show that the equilibrium matching maximizes a social gain function that trades off exploiting complementarities in observable characteristics and matching on unobserved characteristics. We use this result to derive simple closedform formulae that identify the joint matching surplus and the equilibrium utilities of all participants, given any known distribution of unobserved heterogeneity. We provide efficient algorithms to compute the stable matching and to estimate parametric versions of the model. Finally, we revisit Choo and Siow's empirical application to illustrate the potential of our more general approach. 
Date:  2021–06 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2106.02371&r= 
By:  Mauricio Elizalde; Carlos Escudero 
Abstract:  We study a BlackScholes market with a finite time horizon and two investors: an honest and an insider trader. We analyze it with anticipating stochastic calculus in two steps. First, we recover the classical result on portfolio optimization that shows that the expected logarithmic utility of the insider is strictly greater than that of the honest trader. Then, we prove that, whenever the market is viable, the honest trader can get a higher logarithmic utility, and therefore more wealth, than the insider with a strictly positive probability. Our proof relies on the analysis of a sort of forward integral variant of the Dol\'eansDade exponential process. The main financial conclusion is that the logarithmic utility is perhaps too conservative for some insiders. 
Date:  2021–06 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2106.10033&r= 
By:  KenIchi Shimomura (Research Institute for Economics and Business Administration(RIEB), Kobe University, JAPAN) 
Abstract:  We address the problem of predicting how rational agents will form coalitions in a nontransferable utility game, and within each coalition how they will allocate the gains obtained through cooperation. To answer these questions, we propose solution concepts according to which the coalition structure and the payoff allocations are simultaneously determined. We prove the nonemptiness and partial efficiency of the steady bargaining set, a refinement of the Zhou bargaining set, for at least one coalition structure under the restrictive noncrossing condition. In addition, we show the nonemptiness and possible inefficiency of the MasColell bargaining set if this condition is not assumed. 
Keywords:  Nontransferable utility game; Coalition structure; Bargaining set; Restrictive noncrossing condition 
JEL:  C71 D71 
Date:  2021–06 
URL:  http://d.repec.org/n?u=RePEc:kob:dpaper:dp202115&r= 
By:  Borissov, Kirill; Pakhnin, Mikhail; Wendner, Ronald 
Abstract:  In this paper, we propose an approach to describe the behavior of naive agents with quasihyperbolic discounting in the neoclassical growth model. To study timeinconsistent decision making of an agent who cannot commit to future actions, we introduce the notion of sliding equilibrium and dis tinguish between pseudoperfect foresight and perfect foresight. The agent with pseudoperfect foresight revises both the consumption path and expec tations about prices; the agent with perfect foresight correctly foresees prices in a sliding equilibrium and is naive only about their time inconsistency. We prove the existence of sliding equilibria for the class of isoelastic utility func tions and show that generically consumption paths are not the same under quasihyperbolic and exponential discounting. Observational equivalence only holds in the wellknown cases of a constant interest rate or logarithmic utility. Our results suggest that perfect foresight implies a higher longrun capital stock and consumption level than pseudoperfect foresight. 
Keywords:  Quasihyperbolic discounting; Observational equivalence; Time inconsistency; Naive agents; Sliding equilibrium; Perfect foresight 
JEL:  D14 D91 E21 O40 
Date:  2021–01 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:108336&r= 
By:  Areski Cousin (IRMA  Institut de Recherche Mathématique Avancée  UNISTRA  Université de Strasbourg  CNRS  Centre National de la Recherche Scientifique); Ying Jiao (SAF  Laboratoire de Sciences Actuarielle et Financière  UCBL  Université Claude Bernard Lyon 1  Université de Lyon); Christian Robert (CREST  Centre de Recherche en Économie et Statistique  ENSAI  Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz]  X  École polytechnique  ENSAE Paris  École Nationale de la Statistique et de l'Administration Économique  CNRS  Centre National de la Recherche Scientifique); Olivier David Zerbib 
Abstract:  This paper investigates the optimal asset allocation of a financial institution whose customers are free to withdraw their capitalguaranteed financial contracts at any time. Accounting for assetliability mismatch risk of the institution, we present a general utility optimization problem in discrete time setting and provide a dynamic programming principle for the optimal investment strategies. Furthermore, we consider an explicit context, including liquidity risk, interest rate and credit intensity fluctuations, and show, by numerical results, that the optimal strategy improves the solvency and the asset returns of the institution compared to the baseline asset allocation. 
Keywords:  Asset allocation,assetliability management,withdrawal risk,liquidity risk,utility maximization 
Date:  2021–06–01 
URL:  http://d.repec.org/n?u=RePEc:hal:wpaper:hal03244380&r= 
By:  EstepaMohedano, Lorenzo; Espinosa, Maria Paz 
Abstract:  Eliciting risk preferences usually involves tasks that subjects may find complex, such as calculations of expected values and assessment of probabilities in multiple price lists (MPL). There is a serious concern that the decisions of the subjects may be driven by miscalculations or miscalibration of probabilities, rather than by their risk preferences. In this paper, we test whether introducing aids to the usual lottery choiceswould help to reduce the error rate and possibly change risk aversion elicitation. The experiment was run with subjectsfrom a rural area in Honduras. We compare the risk elicitation results of a multiple price list and two different treatments, one with visual aids (graphical representation of probabilities) and the other with contextual framing aids (bills to represent rewards and a distribution of ten beans between the two rewards to represent a lottery). Our results indicate that risk attitudes elicitation was affected with contextual framing aids, reducing risk aversion. For the treatment with visual aids we observe no effect. 
Keywords:  risk elicitation, visual aids, contextual framing aids 
JEL:  C93 D81 
Date:  2021–06–08 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:108440&r= 
By:  Antoinette Baujard (GATE Lyon SaintÉtienne  Groupe d'analyse et de théorie économique  CNRS  Centre National de la Recherche Scientifique  Université de Lyon  UJM  Université Jean Monnet [SaintÉtienne]  UCBL  Université Claude Bernard Lyon 1  Université de Lyon  UL2  Université Lumière  Lyon 2  ENS Lyon  École normale supérieure  Lyon) 
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 valueneutrality claimfor which ethical values should be and are out of the scope of welfare economics, the value confinement idealfor which ethical values are acceptable if they are minimal and consensual, the transparency requirementfor which any ethical values may be acceptable in the welfare economics framework if explicit and formalized, and the entanglement claimwhich 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 
Date:  2021 
URL:  http://d.repec.org/n?u=RePEc:hal:wpaper:halshs03244909&r= 
By:  Avner Seror (AMSE  AixMarseille Sciences Economiques  EHESS  École des hautes études en sciences sociales  ECM  École Centrale de Marseille  CNRS  Centre National de la Recherche Scientifique  AMU  Aix Marseille Université) 
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 
Date:  2021–05–25 
URL:  http://d.repec.org/n?u=RePEc:hal:wpaper:halshs03234653&r= 
By:  Sakemoto, Ryuta 
Abstract:  This study proposes a method to enhance cryptocurrency portfolios constructed by forecast models. This study forecasts returns on four liquid cryptocurrencies (Bitcoin, Litecoin, Ripple, and Dash) and determines the weights on the cryptocurrencies based upon a dynamic allocation framework. We assess the performances of the portfolios using the performance fee measure. Our results present that the proposed portfolios outperform the benchmark portfolio with the conventional level of the risk aversion parameter. The economic gain for an investor is equivalent to 12% per week. The economic gain is sensitive to a change in the risk aversion parameter, which contrasts with the studies of exchange rates which is due to the high volatility on the cryptocurrencies. Our predictors are related to the price momentum effects and they outperform widely used network factors. 
Keywords:  Cryptocurrency, Bitcoin, Portfolio evaluation, Forecast model, Risk aversion 
JEL:  G10 G11 G17 
Date:  2021–06–13 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:108283&r= 
By:  Lippens, Louis (Ghent University); Baert, Stijn (Ghent University); Derous, Eva (Ghent University) 
Abstract:  Using a choice experiment, we test whether tastebased 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 lossframed rather than gainframed. From a policy perspective, it could therefore be more effective to financially penalise tastebased discriminators than to incentivise them not to discriminate. 
Keywords:  tastebased discrimination, employee discrimination, loss aversion, ethnicity 
JEL:  J70 J24 J60 C92 
Date:  2021–06 
URL:  http://d.repec.org/n?u=RePEc:iza:izadps:dp14438&r= 
By:  Christopher Anderson 
Abstract:  I analyze the implications of allowing consumers to make mistakes on the riskreturn relationships predicted by consumptionbased asset pricing models. I allow for consumption mistakes using a model in which a portfolio manager selects investments on a consumer's behalf. The consumer has an arbitrary consumption policy that could reflect a wide range of mistakes. For power utility, expected returns do not generally depend on exposure to singleperiod consumption shocks, but robustly depend on exposure to both longrun consumption and expected return shocks. I empirically show that separately accounting for both types of shocks helps explain the equity premium and cross section of stock returns. 
Keywords:  Asset pricing; Consumer mistakes; Consumptionbased asset pricing; Intertemporal CAPM; Longrun risks 
JEL:  G50 G51 G23 G12 G40 G11 
Date:  2021–03–19 
URL:  http://d.repec.org/n?u=RePEc:fip:fedgfe:202115&r= 
By:  David Desmarchelier; Magali JaoulGrammare; Guillaume Morel; Thi Kim Cuong Pham 
Abstract:  This paper develops a competitive RamseyCassKoopmans framework in which an infectious disease evolves according to a simple SIS model. It aims at examining how the lockdown a§ects infectious disease persistence, individual welfare, and economic dynamics. In contrast to the existing literature, two types of infectives are introduced: (1) symptomatics and (2) asymptomatics. While the former is assumed to be too ill to work, the latter supply their labour and spread the disease. The government imposes a lockdown as an instrument to control the disease spread. In the long run, when the contamination rate of the disease is relatively high and the share of asymptomatics is low enough, the lockdown is welfare improving regardless of the degree of household empathy toward infectives. Moreover, a stable limit cycle can emerge near the endemic steadystate, through a Hopf bifurcation, when the share of infectives increases sufficiently the marginal utility of consumption. Particularly, we prove that it is possible to tune the lockdown to simultaneously obtain the limit cycle disappearance and the disease eradication (BogdanovTakens bifurcation). In this sense, the lockdown allows hitting two birds with one stone. 
Keywords:  BogdanovTakens bifurcation, Hopf bifurcation, Lockdown, Ramsey model, SIS model. 
JEL:  C61 E13 I18 O41 
Date:  2021 
URL:  http://d.repec.org/n?u=RePEc:ulp:sbbeta:202123&r= 
By:  Zengjing Chen; Larry G. Epstein; Guodong Zhang 
Abstract:  This paper establishes a central limit theorem under the assumption that conditional variances can vary in a largely unstructured historydependent way across experiments subject only to the restriction that they lie in a fixed interval. Limits take a novel and tractable form, and are expressed in terms of oscillating Brownian motion. A second contribution is application of this result to a class of multiarmed bandit problems where the decisionmaker is loss averse. 
Date:  2021–06 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2106.05472&r= 
By:  Cornelis Dirk van Goeverden 
Abstract:  Travel speed is an intrinsic feature of transport, and enlarging the speed is considered as beneficial. The benefit of a speed increase is generally assessed as the value of the saved travel time. However, this approach conflicts with the observation that time spent on travelling is rather constant and might not be affected by speed changes. The paper aims to define the benefits of a speed increase and addresses two research questions. First, how will a speed increase in person transport work out, which factors are affected? Second, is the value of time a good proxy for the value of speed? Based on studies on time spending and research on the association between speed and land use, we argue that human wealth could be the main affected factor by speed changes, rather than time or access. Then the value of time is not a good proxy for the value of speed: the benefits of a wealth increase are negatively correlated with prosperity following the law of diminishing marginal utility, while the calculated benefits of saved travel time prove to be positively correlated. The inadequacy of the value of time is explained by some shortcomings with respect to the willingness to pay that is generally used for assessing the value of time: people do not predict correctly the personal benefits that will be gained from a decision, and they neglect the social impacts. 
Date:  2021–06 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2106.06599&r= 
By:  Maćkowiak, Bartosz; Matějka, Filip; Wiederholt, Mirko 
Abstract:  We review the recent literature on rational inattention, identify the main theoretical mechanisms, and explain how it helps us understand a variety of phenomena across fields of economics. The theory of rational inattention assumes that agents cannot process all available information, but they can choose which exact pieces of information to attend to. Several important results in economics have been built around imperfect information. Nowadays, many more forms of information than ever before are available due to new technologies, and yet we are able to digest little of it. Which form of imperfect information we possess and act upon is thus largely determined by which information we choose to pay attention to. These choices are driven by current economic conditions and imply behavior that features numerous empirically supported departures from standard models. Combining these insights about human limitations with the optimizing approach of neoclassical economics yields a new, generally applicable model. JEL Classification: D8 
Keywords:  information choice, rational inattention 
Date:  2021–06 
URL:  http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212570&r= 
By:  Gregory Z. Gutin; Philip R. Neary; Anders Yeo 
Abstract:  We provide necessary and sufficient conditions on the preferences of market participants for a unique stable matching in models of twosided matching with nontransferable utility. We use the process of iterated deletion of unattractive alternatives (IDUA), a formalisation of the reduction procedure in Balinski and Ratier (1997), and we show that an instance of the matching problem possesses a unique stable matching if and only if IDUA collapses each participant preference list to a singleton. (This is in a sense the matching problem analog of a strategic game being dominance solvable.) 
Date:  2021–06 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2106.12977&r= 
By:  Rohan Kekre; Moritz Lenel 
Abstract:  We study the transmission of monetary policy through risk premia in a heterogeneous agent New Keynesian environment. Heterogeneity in households' marginal propensity to take risk (MPR) summarizes differences in portfolio choice on the margin. An unexpected reduction in the nominal interest rate redistributes to households with high MPRs, lowering risk premia and amplifying the stimulus to the real economy. Quantitatively, this mechanism rationalizes the role of news about future excess returns in driving the stock market response to monetary policy shocks and amplifies their real effects by 1.31.5 times. 
JEL:  E44 E52 G12 
Date:  2021–05 
URL:  http://d.repec.org/n?u=RePEc:nbr:nberwo:28869&r= 
By:  Batabyal, Amitrajeet; Beladi, Hamid 
Abstract:  We provide a politicaleconomy analysis of crime prevention in an arbitrary city in the United States. City residents (voters) elect mayors (politicians) and elected mayors determine the resources to be allocated to crime prevention. Between the two time periods, there is an election. Politicians are either honest or dishonest. The marginal cost of public monies ψ measures how efficiently an elected mayor converts tax receipts into crime prevention. Voters have identical per period utility functions. We ascertain the equilibrium outcome and per period voter wellbeing. Second, we show that an increase in ψ reduces the equilibrium allocation of resources to crime prevention and voter wellbeing. Third, a dishonest politician can delay the revelation of his dishonesty. A critical value of ψ,ψ^*, exists such that a dishonest incumbent separates and loses the election if and only if ψ>ψ^* and he pools and is reelected otherwise. Finally, we note that an increase in ψ can raise voter wellbeing when politicians are more likely to be dishonest. 
Keywords:  City Resident, Crime Prevention, Election, Mayor, Voting 
JEL:  D72 R11 R50 
Date:  2020–12–15 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:108294&r= 