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on Utility Models and Prospect Theory |
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Issue of 2021‒10‒25
nine papers chosen by |
| By: | Zaifu Yang; Rong Zhang |
| Abstract: | In this paper we provide a quantitative analysis of how wealth may affect economic growth. In the economy, the utility of every individual depends on both consumption and wealth. Exploring a class of specific utility functions in which wealth has a weakening effect on the marginal utility of consumption, we find a closed-form solution of steady-state consumption, capital stock, savings rate, and convergence rate and obtain several novel results of wealth effects on economic growth. We also demonstrate that the new models can be calibrated to fit well with empirical observation. |
| Keywords: | Economic growth, wealth effects, savings rate, convergence rate. |
| JEL: | C61 O40 O41 |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:21/08&r= |
| By: | Yuval Heller; Ilan Nehama |
| Abstract: | We examine the evolutionary basis for risk aversion with respect to aggregate risk. We study populations in which agents face choices between aggregate risk and idiosyncratic risk. We show that the choices that maximize the long-run growth rate are induced by a heterogeneous population in which the least and most risk averse agents are indifferent between aggregate risk and obtaining its linear and harmonic mean for sure, respectively. Moreover, approximately optimal behavior can be induced by a simple distribution according to which all agents have constant relative risk aversion, and the coefficient of relative risk aversion is uniformly distributed between zero and two. |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2110.11245&r= |
| By: | Emmanuelle Augeraud-Véron; Giorgio Fabbri (GAEL - Laboratoire d'Economie Appliquée de Grenoble - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - UGA - Université Grenoble Alpes - CNRS - Centre National de la Recherche Scientifique - UGA - Université Grenoble Alpes); Katheline Schubert |
| Abstract: | How can decentralized individual decisions inefficiently reduce the ability of biodiversity to mitigate ecological and environmental variability and then its "natural insurance" role? In this article we present a simple theoretical setup to address this question and to evaluate some policy options. We study a model of strategic competition among farmers for the conversion of a natural forest to agricultural land. Unconverted forest land allows to conserve biodiversity, which contributes to reducing the volatility of agricultural production. Agents' utility is given in terms of a Kreps Porteus stochastic differential utility capable of disentangling risk aversion and aversion to fluctuations. We characterize the land used by each farmer and her welfare at the Nash equilibrium, we evaluate the overexploitation of the land and the agents' welfare loss compared to the socially optimal solution and we study the drivers of the inefficiencies of the decentralized equilibrium. After characterizing the value of biodiversity in the model, we use it to obtain a decomposition which helps to study the policy implications of the model by identifying in which cases the allocation of property rights is preferable to the introduction of a tax on land conversion. Our results suggest that enforcing property rights is more relevant in case of stagnant economies while taxing land conversion may be more suited for rapidly developing economies. |
| Date: | 2021–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03369958&r= |
| By: | Semyon Malamud (Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Anna Cieslak (Duke University - Fuqua School of Business; CEPR; National Bureau of Economic Research (NBER)); Andreas Schrimpf (Bank for International Settlements (BIS) - Monetary and Economic Department; CREATES - Aarhus University) |
| Abstract: | How should an agent (the sender) observing multi-dimensional data (the state vector) persuade another agent (the receiver) to take the desired action? We show that it is always optimal for the sender to perform a (non-linear) dimension reduction by projecting the state onto a lower dimensional object that we call the "optimal information manifold". We characterize geometric properties of this manifold and link them to the sender's preferences. Optimal policy splits information into "good" and "bad" components. When the sender's marginal utility is linear, it is always optimal to reveal the full magnitude of good information. In contrast, with concave marginal utility, optimal information design conceals the extreme realizations of good information and only reveals its direction (sign). We illustrate these effects by explicitly solving several multi-dimensional Bayesian persuasion problems. |
| Keywords: | Bayesian Persuasion, Information Design, Signalling |
| JEL: | D82 D83 E52 E58 E61 |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2169&r= |
| By: | Sosung Baik; Sung-Ha Hwang |
| Abstract: | We study the optimal auction design problem when bidders' preferences follow the maxmin expected utility model. We suppose that each bidder's set of priors consists of beliefs close to the seller's belief, where "closeness" is defined by a divergence. For a given allocation rule, we identify a class of optimal transfer candidates, named the win-lose dependent transfers, with the following property: each type of bidder's transfer conditional on winning or losing is independent of the competitor's type report. Our result reduces the infinite-dimensional optimal transfer problem to a two-dimensional optimization problem. By solving the reduced problem, we find that: (i) among efficient mechanisms with no premiums for losers, the first-price auction is optimal; and, (ii) among efficient winner-favored mechanisms where each bidder pays smaller amounts when she wins than loses: the all-pay auction is optimal. Under a simplifying assumption, these two auctions remain optimal under the endogenous allocation rule. |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2110.08563&r= |
| By: | Sharma, Sankalp; Bairagi, Subir K. |
| Keywords: | Agricultural and Food Policy, Agribusiness, Risk and Uncertainty |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea21:313998&r= |
| By: | Steinke, Marek; Trautmann, Stefan |
| Abstract: | Both research and anecdotal evidence suggest that people care about long-run environmental outcomes, but often fail to act sustainably, endangering environmental stability. For a large population sample, we show that people substantially value the environment intrinsically, i.e., even after their own and their kin’s lifespan. Willingness-to-pay for very long-run environmental benefits not experienced by the respondent is similar to that of short-run benefits, experienced by the respondent. However, adding a cooperation problem through uncertainty about other people’s preferences significantly decreases participants’ willingness-to-pay for both time frames, with respondents being pessimistic about others’ willingness to contribute. |
| Date: | 2021–10–19 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0706&r= |
| By: | Philippe Jehiel (PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Matthew Leduc (PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement) |
| Abstract: | Successive governments must decide whether to implement an affirmative action policy aimed at improving the performance distribution of the next generation of a targeted group. Workers receive wages corresponding to their expected performance, suffer a feeling of injustice when getting less than their performance, and employers do not (perfectly) observe whether workers benefited from affirmative action. We find that welfare-maximizing governments choose to implement affirmative action perpetually, despite the resulting feeling of injustice that eventually dominates the purported beneficial effect on the performance of the targeted group. This is in contrast with the first-best that requires affirmative action to be temporary. |
| Keywords: | Affirmative Action,General Equilibrium,Loss Aversion,Prospect Theory,Moral Hazard,Game Theory |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-03359602&r= |
| By: | Stéphane Gauthier (PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, Institute for Fiscal Studies); Guy Laroque (Institut d'Études Politiques [IEP] - Paris, UCL - University College of London [London], Institute for Fiscal Studies) |
| Abstract: | This paper assesses the usefulness of stochastic contracts in the presence of informational asymmetries. It identifies circumstances where a stochastic redistribution policy is socially dominated by the deterministic policy where after-tax income lotteries are replaced with their certainty equivalent. It also provides a parametric example where every stochastic menu which has the optimal deterministic menu as certainty equivalent is dominated by the deterministic menu, while there exist feasible and incentive compatible lotteries improving locally upon the deterministic menu. |
| Keywords: | Asymmetric information,Random contracts,Certainty equivalent |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-03359574&r= |