nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2022‒05‒16
nine papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Individual Rationality Conditions Identify Matching Costs in Transferable Utility Matching Games By Suguru Otani
  2. Modeling Uncertainty as Ambiguity: a Review By Cosmin L. Ilut; Martin Schneider
  3. Cross-Dynastic Intergenerational Altruism By Frikk Nesje
  4. Estimating Separable Matching Models By Alfred Galichon; Bernard Salani\'e
  5. Fundamental Uncertainty as Model Uncertainty By Owen F. Davis
  6. The Savings Glut of the Old: Population Aging, the Risk Premium, and the Murder-Suicide of the Rentier By Joseph Kopecky; Alan M. Taylor
  7. Infinite Population Utilitarian Criteria By Geir B. Asheim; Kohei Kamaga; Stéphane Zuber
  8. Are risk preferences consistent across elicitation procedures ? A field experiment in Congo Basin countries By Marielle Brunette; Jonas Ngouhouo-Poufoun
  9. Reducing Water Pollution from Nitrogen Fertilizer: Revisiting Insights from Production Economics By Chai, Yuan; Pannell, David J.; Pardey, Philip G.

  1. By: Suguru Otani
    Abstract: A widely applied method for matching maximum score estimation, introduced by \cite{fox2010qe}, is founded on measuring assortativeness in a transferable utility matching game by using pairwise stable matchings. This article shows that the use of unmatched agents, transfers, and individual rationality conditions with sufficiently large penalty terms makes it possible to identify a coefficient parameter of a single common constant, that is, a common matching cost in the market.
    Date: 2022–04
  2. By: Cosmin L. Ilut; Martin Schneider
    Abstract: We survey literature on ambiguity with an emphasis on recent applications in macroeconomics and finance. Like risk, ambiguity leads to cautious behavior and uncertainty premia in asset markets. Unlike risk, ambiguity can generate first order welfare losses. As a result, precautionary behavior and ambiguity premia obtain even when agents have linear utility and are reflected in linear approximations to model dynamics. Quantitative work exploits this insight to estimate models that jointly match the dynamics of asset prices and macro aggregates. In micro data, inertia and inaction due to ambiguity help understand patterns such as non-participation in asset markets, price rigidities and simple contracts. Learning under ambiguity generates asymmetric responses to news that help connect higher moments in micro and macro data. Survey evidence is increasingly used to provide direct evidence on ambiguity averse behavior, as well as to discipline quantitative models.
    JEL: D8 E2 E3 E4 G1
    Date: 2022–04
  3. By: Frikk Nesje
    Abstract: I study whether saving behavior reveals socially relevant intertemporal preferences. To this end, I decompose the present generation’s preference for the next into its dynastic and cross-dynastic components in a model of saving. If people are concerned about the next generation as such, then they might assign welfare weights on other dynasties. With such cross-dynastic intergenerational altruism, saving for one’s descendants benefits present members of other dynasties. These preference externalities imply that socially relevant intertemporal preferences cannot be inferred from saving behavior. Numerically, I show that even \small" preferences for the next generation as such can lower the efficient discount rate by 20% to 40%, as compared to Nordhaus’ calibration.
    Keywords: intergenerational altruism, social discounting, time-inconsistency, declining discount rates, generalized consumption Euler equations, interdependent utility, isolation paradox
    JEL: D64 D71 H43 Q01 Q54
    Date: 2022
  4. By: Alfred Galichon; Bernard Salani\'e
    Abstract: In this paper we propose two simple methods to estimate models of matching with transferable and separable utility introduced in Galichon and Salani\'e (2022). The first method is a minimum distance estimator that relies on the generalized entropy of matching. The second relies on a reformulation of the more special but popular Choo and Siow (2006) model; it uses generalized linear models (GLMs) with two-way fixed effects.
    Date: 2022–04
  5. By: Owen F. Davis (Department of Economics, New School for Social Research)
    Abstract: Economic agents must form models of their environments in order to develop expectations and make decisions, yet these models are certain to be misspecified. An agent aware of their own inability to perfectly capture the structural relationships of their observed world will entertain model uncertainty. Under the plausible assumptions that the “true” model is not known to the decision-maker and the decision-maker knows this—known as the M-open case in Bayesian statistics—uncertainty over propositions becomes numerically irreducible. The notion of model uncertainty is developed with reference to Post Keynesian theories of fundamental uncertainty as well as relevant areas of study within decision theory, including the growing literature on unawareness. The model uncertainty view poses challenges for both literatures and provides a novel justification for the types of uncertainty associated with Knight and Keynes.
    Keywords: Fundamental uncertainty, model uncertainty, decision theory, Post Keynesian
    JEL: C11 D81 E12
    Date: 2022–04
  6. By: Joseph Kopecky; Alan M. Taylor
    Abstract: Population aging has been linked to a global savings glut and a decline in safe real interest rates. Conversely, risky real returns have not fallen as much, if at all, with equity risk premia on the rise. An existing literature can explain changes in safe rates using demographics. We go further to account for divergent returns on different assets as well as the underlying surge in the wealth-income ratio and its asset composition. Empirical evidence from historical panel data shows that demographic shifts are correlated with asset returns and risk premia. We build a heterogeneous agent life-cycle model with two assets (a safe bond and equity) and with aggregate risk. Aging demographics can help to simultaneously explain three key trends: the rising wealth-income ratio, the falling risk free rate, and an increasing risk premium. The shifts exert less pressure on risky returns as high-wealth elderly reallocate away from equities: aging makes retirement saving a “crowded trade” but more so for bonds. Projecting our model to 2050, aging pushes the safe rate below zero, but the risk premium remains elevated, as post-boomer demographics push asset returns to unprecedented and persistently low levels.
    JEL: E21 E43 G11 J11
    Date: 2022–04
  7. By: Geir B. Asheim; Kohei Kamaga; Stéphane Zuber
    Abstract: We examine utilitarian criteria for evaluating profiles of wellbeing among infinitely many individuals. Motivated by the non-existence of a natural 1-to-1 correspondence between people when alternatives have different population structures, with a different number of people in each generation, we impose equal treatment in the form of Strong Anonymity. We show how a novel criterion, Strongly Anonymous Utilitarianism, can be characterized by combining Strong Anonymity with other regularity axioms (Monotonicity, Finite Completeness, and continuity axioms) as well as axioms of equity, sensitivity, separability, and population ethics. We relate it to other strongly anonymous utilitarian criteria and demonstrate its applicability by showing how it leads to an efficient and sustainable stream in the Ramsey model.
    Keywords: utilitarianism, intergenerational equity, population ethics
    JEL: D63 D71 Q01
    Date: 2022
  8. By: Marielle Brunette (BETA - Bureau d'Économie Théorique et Appliquée - UNISTRA - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, Climate Economics Chair - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres); Jonas Ngouhouo-Poufoun (BETA - Bureau d'Économie Théorique et Appliquée - UNISTRA - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CIFOR - Center for International Forestry Research - CGIAR - Consultative Group on International Agricultural Research [CGIAR])
    Abstract: We compare individual risk preferences elicited through a classic Ordered Lottery Selection (OLS) procedure with five gambles, and an extended procedure composed of nine gambles. The research question is about the stability of the risk preferences across these two elicitation variants. We implemented a field experiment with 1002 rural households in the Congo Basin from December 2013 to July 2014. We show that 1/3 of the sample is extremely risk averse regardless of the procedure. We found inconsistencies in risk preferences elicited across procedures. Indeed, 45.71% are characterized by instability of preferences, either weak (34.53%) or strong (11.18%); 42.81% of the sample exhibits stable preferences and the remaining 11.48% of the sample-initially risk neutral in the classic procedure-is classified as risk loving in the extended procedure. Undereducation can be seen as the main driver of the strong instability since the incremental change brought about by the attainment of secondary school on the likelihood to remain stable is ten times greater than the other considered drivers.
    Keywords: Farmers,Preferences,Ordered lottery selection,Risk aversion,Field experiment
    Date: 2021–02–05
  9. By: Chai, Yuan; Pannell, David J.; Pardey, Philip G.
    Abstract: Nitrogen sourced from agricultural fertilizers is a major contributor to water pollution. Despite policies targeting a range of farming practice changes, the goal of substantially reducing nitrogen losses from farms remains elusive. We highlight three empirical results from production economics that appear to provide untapped opportunities for policies to reduce nitrogen rates. First, many farmers apply more nitrogen than required to maximize expected profits or utility. Second, contrary to the perceptions of some farmers and farm advisers, nitrogen fertilizer is a risk- increasing input. Third, over wide ranges of nitrogen fertilizer rates, the relationship between rate and profit is remarkably flat, meaning that farmers can reduce fertilizer usage substantially at minimal private cost. We discuss a variety of policy options for efficiently exploiting these insights.
    Keywords: Crop Production/Industries, Environmental Economics and Policy, Risk and Uncertainty
    Date: 2022–04

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