nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2021‒08‒23
twenty papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Modeling ex-ante risk premia in the oil market By Georges Prat; Remzi Uctum
  2. Risk Preferences in Time Lotteries By Yonatan Berman; Mark Kirstein
  3. Estimating Time Preferences for Leisure By Bigoni, Maria; Dragone, Davide; Luchini, Stéphane; Prati, Alberto
  4. A model of social welfare improving transfers By Brice Magdalou
  5. The Decline of Drudgery and the Paradox of Hard Work By Brendan Epstein; Miles S. Kimball
  6. Identification of Incomplete Preferences By Arie Beresteanu
  7. Place-Based Redistribution in Location Choice Models By Morris Davis; Jesse M. Gregory
  8. Stable Marriage, Household Consumption and Unobserved Match Quality By Martin Browning; Laurens Cherchye; Thomas Demuynck; Bram De Rock; Frederic Vermeulen
  9. What if we knew what the future brings? By Peter Bank; Yan Dolinsky; Mikl\'os R\'asonyi
  10. The Damages and Distortions from Discrimination in the Rental Housing Market By Peter Christensen; Christopher Timmins
  11. Fishing for Good News: Motivated Information Acquisition By Si Chen; Carl Heese
  12. Vaccine Hesitancy, Passports and the Demand for Vaccination By Joshua S. Gans
  13. A characterization of lexicographic preferences By Mridu Prabal Goswami; Manipushpak Mitra; Debapriya Sen
  14. Grade Inflation and Stunted Effort in a Curved Economics Course By Alex Garivaltis
  15. Term structure of interest rates: modelling the risk premium using a two horizons framework By Georges Prat; Remzi Uctum
  16. Information Foraging in the Attention Economy By Charlie Pilgrim; Weisi Guo; Thomas T. Hills
  17. Choice by Rejection By Bhavook Bhardwaj; Kriti Manocha
  18. A Collective Investment in Financial Literacy by Heterogeneous Households By Stylianos Papageorgiou; Dimitrios Xefteris
  19. Preference for randomization and validity of random incentive system under ambiguity: An experiment By Tomohito Aoyama; Nobuyuki Hanaki
  20. A Free and Fair Economy: A Game of Justice and Inclusion By Ghislain H. Demeze-Jouatsa; Roland Pongou; Jean-Baptiste Tondji

  1. By: Georges Prat (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique); Remzi Uctum (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Using survey-based data we show that oil price expectations are not rational, implying that the ex-ante premium is a more relevant concept than the widely popular expost premium. We propose for the 3-and 12-month horizons a portfolio choice model with risky oil assets and a risk-free asset. At the maximized expected utility the risk premium is defined as the risk price times the expected oil return volatility. A state-space model, where the risk prices are represented as stochastic unobservable components and where expected volatilities depend on historical squared returns, is estimated using Kalman filtering. We find that the representative investor is risk seeking at short horizons and risk averse at longer horizons. We examine the economic factors driving risk prices whose signs are shown to be consistent with the predictions of the prospect theory. An upward sloped term structure of oil risk premia prevails in average over the period.
    Keywords: oil market,oil price expectations,ex-ante risk premium JEL classification : D81
    Date: 2021–06–03
  2. By: Yonatan Berman; Mark Kirstein
    Abstract: An important but understudied question in economics is how people choose when facing uncertainty in the timing of events. Here we study preferences over time lotteries, in which the payment amount is certain but the payment time is uncertain. Expected discounted utility theory (EDUT) predicts decision makers to be risk-seeking over time lotteries. We explore a normative model of growth-optimality, in which decision makers maximise the long-term growth rate of their wealth. Revisiting experimental evidence on time lotteries, we find that growth-optimality accords better with the evidence than EDUT. We outline future experiments to scrutinise further the plausibility of growth-optimality.
    Date: 2021–08
  3. By: Bigoni, Maria (University of Bologna); Dragone, Davide (University of Bologna); Luchini, Stéphane (Aix-Marseille University); Prati, Alberto (Aix-Marseille University)
    Abstract: We study time preferences by means of a longitudinal lab experiment involving both monetary and non-monetary rewards (leisure). Our novel design allows to measure whether participants prefer to anticipate or delay gratification, without imposing any structural assumption on the instantaneous utility, intertemporal utility or the discounting functions. We find that most people prefer to anticipate monetary rewards (positive time preferences for money), but they delay non-monetary rewards (negative time preferences for leisure). These results cannot be explained by personal timetables and heterogeneous preferences only. They invite to reconsider the psychological interpretation of the discount factor, and suggest that the assumption that discounting is consistent across domains can lead to non-negligible prediction errors in models involving non-monetary decisions, such as labor supply models.
    Keywords: consistency across domains, negative discounting, laboratory experiment, non-monetary rewards
    JEL: C91 D01 D91 J22
    Date: 2021–07
  4. By: Brice Magdalou (CEE-M - Centre d'Economie de l'Environnement - Montpellier - UMR 5211 - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: This paper provides a generalization of the Hardy-Littlewood-Polya (HLP) Theorem in the following discrete framework: a distribution counts the number of persons having each possible individual outcome –assumed to be finitely divisible– and social welfare improving transfers have the structure of a discrete cone. The generalization is abstract in the sense that individual outcomes can be unidimensional or multidimensional, each dimension can be cardinal or ordinal and no further specification is required for the transfers. It follows that most of the results in the literature, applied to discrete distributions and comparable to the HLP Theorem, are corollaries of our theorem. In addition, our model sheds new light on some surprising results in the literature on social deprivation and, in decision-making under risk, provides new arguments on the key role of the expected utility model.
    Keywords: Hardy-Littlewood-Polya Theorem,stochastic dominance,risk,social welfare,inequality,welfare-improving transfers
    Date: 2021–06–24
  5. By: Brendan Epstein; Miles S. Kimball
    Abstract: We develop a theory that focuses on the general equilibrium and long-run macroeconomic consequences of trends in job utility—the process benefits and costs of work. Given secular increases in job utility, work hours per population can remain approximately constant over time even if the income effect of higher wages on labor supply exceeds the substitution effect. In addition, secular improvements in job utility can be substantial relative to welfare gains from ordinary technological progress. These two implications are connected by an equation flowing from optimal hours choices: improvements in job utility that have a significant effect on labor supply tend to have large welfare effects.
    JEL: J22 J24 J28 J31 O4
    Date: 2021–07
  6. By: Arie Beresteanu
    Abstract: We provide a sharp identification region for discrete choice models in which consumers' preferences are not necessarily complete and only aggregate choice data is available to the analysts. Behavior with non complete preferences is modeled using an upper and a lower utility for each alternative so that non-comparability can arise. The identification region places intuitive bounds on the probability distribution of upper and lower utilities. We show that the existence of an instrumental variable can be used to reject the hypothesis that all consumers' preferences are complete, while attention sets can be used to rule out the hypothesis that all individuals cannot compare any two alternatives. We apply our methods to data from the 2018 mid-term elections in Ohio.
    Date: 2021–01
  7. By: Morris Davis; Jesse M. Gregory
    Abstract: In many recent location choice models, households randomly vary with respect to their utility of living in a location. We demonstrate that the distribution generating this randomness is fundamentally not identifiable from location choice data and as a result the optimal allocation as chosen by a social planner is not identified. We propose an algorithm for setting the distribution generating the random utility across locations that implies a planner will optimally choose no redistribution in the absence of externalities or equity motives between different groups of people. Our algorithm preserves a planner's motives to redistribute due to equity considerations between different types of people and efficiency in production, the focus of many recent studies.
    JEL: H0 R38
    Date: 2021–07
  8. By: Martin Browning; Laurens Cherchye; Thomas Demuynck; Bram De Rock; Frederic Vermeulen
    Abstract: We present a methodology for the structural empirical analysis of household consumption and time use behaviour under marital stability. Our approach is of the revealed preference type and non-parametric, meaning that it does not require a prior functional specification of individual utilities. Without making use of the transferable utility assumption, but still allowing for monetary transfers, our method can identify individuals' unobserved match qualities and quantify them in money metric terms. We can include both preference factors, affecting individuals' preferences over private and public goods, and match quality factors, driving differences in unobserved match quality. We demonstrate the practical usefulness of our methodology through an application to the Belgian MEqIn data. Our results reveal intuitive patterns of unobserved match quality that allow us to rationalise both the observed matches and the within-household allocations of time and money.
    Keywords: household consumption, marital stability, unobserved match quality, revealed preference analysis, intrahousehold allocation.
    Date: 2021–08
  9. By: Peter Bank; Yan Dolinsky; Mikl\'os R\'asonyi
    Abstract: In this paper we study optimal investment when the investor can peek some time unites into the future, but cannot fully take advantage of this knowledge because of quadratic transaction costs. In the Bachelier setting with exponential utility, we give an explicit solution to this control problem with intrinsically infinite-dimensional memory. This is made possible by solving the dual problem where we make use of the theory of Gaussian Volterra integral equations.
    Date: 2021–08
  10. By: Peter Christensen; Christopher Timmins
    Abstract: By constraining an individual’s choice during a search, housing discrimination dis- torts sorting decisions away from true preferences and results in a ceteris paribus reduction in welfare. This study combines a large-scale field experiment with a residential sorting model to derive utility-theoretic measures of renter welfare loss associated with the constraints imposed by discrimination in the rental housing market. Results from experiments conducted in five cities show that key neighbor- hood amenities are associated with higher levels of discrimination. Results from the structural model indicate that discrimination imposes costs equivalent to 4.7% of annual income for renters of color, and that search behavior results in greater welfare costs for African Americans as their incomes rise. Renters of color must make substantial investments in additional search to mitigate the costs of these constraints. We find that a naive model ignoring discrimination constraints yields significantly biased estimates of willingness to pay.
    JEL: Q51 Q53 R31
    Date: 2021–07
  11. By: Si Chen; Carl Heese
    Abstract: The literature on motivated reasoning argues that people skew their beliefs to feel moral when acting selfishly. We study information acquisition of decision-makers with a motive to form positive moral self-views and a motive to act selfishly. Theoretically and experimentally, we find that a motive to act selfishly makes individuals 'fish for good news': they are more likely to continue (stop) acquiring information, having received mostly information suggesting that acting selfishly is harmful (harmless) to others. We find that fishing for good news may improve social welfare. Finally, more intelligent individuals have a higher tendency to fish for good news.
    Keywords: Motivated Beliefs, Social Preferences, Information Preferences, Bayesian Persuasion, Belief Utility
    JEL: D90 D91
    Date: 2021–08
  12. By: Joshua S. Gans
    Abstract: Vaccine hesitancy is modelled as an endogenous decision within a behavioural SIR model with endogenous agent activity. It is shown that policy interventions that directly target costs associated with vaccine adoption may counter vaccine hesitancy while those that manipulate the utility of unvaccinated agents will either lead to the same or lower rates of vaccine adoption. This latter effect arises with vaccine passports whose effects are mitigated in equilibrium by reductions in viral/disease prevalence that themselves reduce the demand for vaccination.
    JEL: I12 I18
    Date: 2021–07
  13. By: Mridu Prabal Goswami; Manipushpak Mitra; Debapriya Sen
    Abstract: This paper characterizes lexicographic preferences over alternatives that are identified by a finite number of attributes. Our characterization is based on two key concepts: a weaker notion of continuity called 'mild continuity' (strict preference order between any two alternatives that are different with respect to every attribute is preserved around their small neighborhoods) and an 'unhappy set' (any alternative outside such a set is preferred to all alternatives inside). Three key aspects of our characterization are: (i) use of continuity arguments, (ii) the stepwise approach of looking at two attributes at a time and (iii) in contrast with the previous literature, we do not impose noncompensation on the preference and consider an alternative weaker condition.
    Date: 2021–08
  14. By: Alex Garivaltis
    Abstract: To protect his teaching evaluations, an economics professor uses the following exam curve: if the class average falls below a known target, $m$, then all students will receive an equal number of free points so as to bring the mean up to $m$. If the average is above $m$ then there is no curve; curved grades above $100\%$ will never be truncated to $100\%$ in the gradebook. The $n$ students in the course all have Cobb-Douglas preferences over the grade-leisure plane; effort corresponds exactly to earned (uncurved) grades in a $1:1$ fashion. The elasticity of each student's utility with respect to his grade is his ability parameter, or relative preference for a high score. I find, classify, and give complete formulas for all the pure Nash equilibria of my own game, which my students have been playing for some eight semesters. The game is supermodular, featuring strategic complementarities, negative spillovers, and nonsmooth payoffs that generate non-convexities in the reaction correspondence. The $n+2$ types of equilibria are totally ordered with respect to effort and Pareto preference, and the lowest $n+1$ of these types are totally ordered in grade-leisure space. In addition to the no-curve ("try-hard") and curved interior equilibria, we have the "$k$-don't care" equilibria, whereby the $k$ lowest-ability students are no-shows. As the class size becomes infinite in the curved interior equilibrium, all students increase their leisure time by a fixed percentage, i.e., $14\%$, in response to the disincentive, which amplifies any pre-existing ability differences. All students' grades inflate by this same (endogenous) factor, say, $1.14$ times what they would have been under the correct standard.
    Date: 2021–08
  15. By: Georges Prat (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique); Remzi Uctum (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We propose a two-horizon interest rate term structure model where the maturity of the riskless rate is the one of the debt security whose duration equals investor's desired horizon. Our framework thus relaxes the usual assumptions of the literature that the riskless rate is unchangingly the short period rate. A representative investor compares at each of the 3and the 6-month horizons the risk premium offered by the market and the one they require to take a risky position, the latter premium being determined by the portfolio choice theory. Due to market frictions, the deviation between the offered and required risk premium evolves according to a mean-reverting process. Using 3-month ahead survey-based expectations of the US 3-month Treasury Bill rate, we employ Kalman filtering to estimate the market risk premium where the preference parameter of investors for alternative horizons is time-varying. We find that the market comprises both a group of agents with 3-month preferred horizon and a group of agents with 6-month preferred horizon with a weigh of two-thirds for the first group.
    Keywords: interest rates,term structure,risk premium
    Date: 2021
  16. By: Charlie Pilgrim; Weisi Guo; Thomas T. Hills
    Abstract: Over the past 200 years, rising rates of information proliferation have created new environments for information competition and, consequently, new selective forces on information evolution. These forces influence the information diet available to consumers, who in turn choose what to consume, creating a feedback process similar to that seen in many ecosystems. As a first step towards understanding this relationship, we apply animal foraging models of diet choice to describe the evolution of long and short form media in response to human preferences for maximising utility rate. The model describes an increase in information rate (i.e., entropy) in response to information proliferation, as well as differences in entropy between short-form and long-form media (such as social media and books, respectively). We find evidence for a steady increase in word entropy in diverse media categories since 1900, as well as an accelerated entropy increase in short-form media. Overall the evidence suggests an increasingly competitive battle for our attention that is having a lasting influence on the evolution of language and communication systems.
    Date: 2021–07
  17. By: Bhavook Bhardwaj; Kriti Manocha
    Abstract: We propose a boundedly rational model of choice where agents eliminate dominated alternatives using a transitive rationale before making a choice using a complete rationale. This model is related to the seminal two-stage model of Manzini and Mariotti (2007), the Rational Shortlist Method (RSM). We analyze the model through reversals in choice and provide its behavioral characterization. The procedure satisfies a weaker version of the Weak Axiom of Revealed Preference (WARP) allowing for at most two reversals in choice in terms of set inclusion for any pair of alternatives. We show that the underlying rationales can be identified from the observable reversals in the choice. We also characterize a variant of this model in which both the rationales are transitive
    Date: 2021–08
  18. By: Stylianos Papageorgiou; Dimitrios Xefteris
    Abstract: Skills obtained by a national strategy, plus intrinsic skills, contribute to each household's financial literacy, which is shown to determine whether and to what extent a household invests. Ends-against-the-middle preferences arise as to the strategy's funding: Households with too low or too high total skills have a decreasing utility, as opposed to households with moderate skills. Moreover, the property of single-peaked preferences is violated. Our central result is that, despite the lack of well-behaved preferences, competing office-motivated political candidates propose the same-efficient-funding level under plausible assumptions, including that they are sufficiently differentiated about issues other than financial literacy.
    Keywords: financial literacy, electoral competition, ends-against-the-middle, differentiated candidates
    JEL: G53 D72 H52
    Date: 2021–07
  19. By: Tomohito Aoyama; Nobuyuki Hanaki
    Abstract: The random Incentive System (RIS) is a standard method to incentivize participants in economic experiments. However, recent theoretical studies point out the possibility of its failure under ambiguity. We propose a modification of RIS, named independent RIS (I-RIS), to improve its reliability. We conducted an experiment to evaluate the performances of the standard RIS and I-RIS in direct and indirect manners. Whereas a nonnegligible fraction of participants are not consistent with the reversal-of-order axiom, a majority of ambiguity averse and seeking participants are. This implies that participants with nonneutral ambiguity attitudes may not report truthful preferences when RIS is used. However, randomization attitudes do not explain inconsistent choices under RIS. In addition, we did not find significant differences in performance between RIS and I-RIS. These results suggest that preferences for randomization, which is driven by nonneutral ambiguity attitudes, do not cause the failure of RIS.
    Date: 2021–08
  20. By: Ghislain H. Demeze-Jouatsa; Roland Pongou; Jean-Baptiste Tondji
    Abstract: Frequent violations of fair principles in real-life settings raise the fundamental question of whether such principles can guarantee the existence of a self-enforcing equilibrium in a free economy. We show that elementary principles of distributive justice guarantee that a pure-strategy Nash equilibrium exists in a finite economy where agents freely (and non-cooperatively) choose their inputs and derive utility from their pay. Chief among these principles is that: 1) your pay should not depend on your name, and 2) a more productive agent should not earn less. When these principles are violated, an equilibrium may not exist. Moreover, we uncover an intuitive condition -- technological monotonicity -- that guarantees equilibrium uniqueness and efficiency. We generalize our findings to economies with social justice and inclusion, implemented in the form of progressive taxation and redistribution, and guaranteeing a basic income to unproductive agents. Our analysis uncovers a new class of strategic form games by incorporating normative principles into non-cooperative game theory. Our results rely on no particular assumptions, and our setup is entirely non-parametric. Illustrations of the theory include applications to exchange economies, surplus distribution in a firm, contagion and self-enforcing lockdown in a networked economy, and bias in the academic peer-review system. Keywords: Market justice; Social justice; Inclusion; Ethics; Discrimination; Self-enforcing contracts; Fairness in non-cooperative games; Pure strategy Nash equilibrium; Efficiency. JEL Codes: C72, D30, D63, J71, J38
    Date: 2021–07

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