nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2022‒05‒23
ten papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Fairness-based Altruism By Breitmoser, Yves; Vorjohann, Pauline
  2. Regulation through Reference Prices By Alfredo Salgado
  3. Does the Labour Theory of Value Explain Economic Growth? A Modern Classical View By Chatzarakis, Nikolaos; Tsaliki, Persefoni; Tsoulfidis, Lefteris
  4. Optimal Taxation of Risky Entrepreneurial Capital By Corina Boar; Matthew P. Knowles
  5. Willingness to pay, surplus and Insurance policy under dual theory By Neji Saidi
  6. Semantics meets attractiveness: Choice by salience By Alfio Giarlotta; Angelo Petralia; Stephen Watson
  7. Competing Sellers in Security-Bid Auctions under Risk-Averse Bidders By Diego Carrasco-Novoa; Allan Hernández-Chanto
  8. Incentives in Social Decision Schemes with Pairwise Comparison Preferences By Felix Brandt; Patrick Lederer; Warut Suksompong
  9. Optimal Estate Taxation: More (about) Heterogeneity across Dynasties By Philipp Krug
  10. Worker well-being and quit intentions: is measuring job satisfaction enough? By Diane Pelly

  1. By: Breitmoser, Yves (Center for Mathematical Economics, Bielefeld University); Vorjohann, Pauline (Center for Mathematical Economics, Bielefeld University)
    Abstract: Why do people give when asked, but prefer not to be asked, and even take when possible? We introduce a novel analytical framework that allows us to express context dependence and narrow bracketing axiomatically. We then derive the utility representation of distributive preferences additionally obeying standard axioms such as separability and scaling invariance. Such pref- erences admit a generalized prospect-theoretical utility representation reminiscent of fairness- based altruism. As in prospect theory, the underlying preferences are reference dependent and non-convex, which directly predicts the previously irreconcilable empirical evidence on giving, sorting, and taking. We test the model quantitatively on data from seminal experiments and observe significantly improved fit in relation to existing models, both in-sample and out-of- sample.
    Keywords: Social preferences, axiomatic foundation, robustness, giving, charitable donations
    Date: 2022–05–13
  2. By: Alfredo Salgado
    Abstract: This paper theoretically analyzes the role of reference prices on competition and welfare in a context of a circular city model with free entry and reference prices, in which paying market prices above a reference negatively affects the utility of consumers. Agents interact in a three-stage game: 1. A policymaker chooses a reference price to maximize consumer welfare. 2. Firms make their entry decision. 3. Firms compete in prices and consumers make their consumption decisions. We find that in equilibrium the market price and the optimal reference price chosen by the policymaker always coincide. In addition, it is shown that the use of reference prices reduces market equilibrium prices compared with the case without reference prices, which implies a net welfare gain for consumers. These gains could be higher in less competitive environments and lower in the presence of higher marginal costs.
    JEL: C7 D4 D9 L1 L2 L5
    Date: 2022–03
  3. By: Chatzarakis, Nikolaos; Tsaliki, Persefoni; Tsoulfidis, Lefteris
    Abstract: The labour theory of value (LTV) is the cornerstone of the classical and Marxian political economy for it explains the creation and valuation of wealth in capitalist societies and it remains the chief analytical tool in investigating economic phenomena. In this respect macroscopic phenomena, which include many distinct production processes evolving over long gestation periods, conceal the transformation of labour values into their monetary expression (prices). Consequently, the use of the LTV on a grand and dynamic scale is usually considered inapplicable in the construction of macroeconomic models. The classical/Marxian analysis is conducted through either multi-dimensional multi-sectoral models or the solution of the summation problem of heterogeneous commodities. However, many studies have corroborated the dynamic aspects of the LTV and probed for a reduction in the dimensionality of macroeconomic models. In this paper, on the one hand, we restate the dynamic aspects of the LTV over time and, on the other hand, ascertain its utility as a long-run macroeconomic tool. The way to proceed is to model the divergence of actual prices and quantities of commodities from their equilibria in a multi-sectoral economy and establish that the long-run behaviour of the system mirrors the long-run movement of the labour values.
    Keywords: labour theory of value; heterodox microeconomics; micro-founding of economic growth; dynamic input-output analysis
    JEL: B51 C61 D46 D57 E32
    Date: 2022–04–21
  4. By: Corina Boar; Matthew P. Knowles
    Abstract: We study optimal taxation in a model with endogenous financial frictions, risky investment and occupational choice, where the distribution of wealth across entrepreneurs affects how efficiently capital is used. The planner chooses linear taxes on wealth, capital and labor income to maximize the steady state utility of a newborn agent. Most agents in the model are poor, leading to a redistributive motive for taxation. Optimal tax rates can be written as a closed-form function of the size of the tax bases and their elasticities with respect to tax rates. We find that it is optimal to tax capital income because financial frictions reduce the elasticity of capital income with respect to taxes and because capital income taxes prevent excessive entry into entrepreneurship. Optimal wealth taxes are positive but close to zero, since they strongly discourage capital accumulation.
    JEL: E2 E6 H2
    Date: 2022–04
  5. By: Neji Saidi
    Abstract: In this paper, we aims to state some proprieties of willingness to pay (WTP) for partial risk reduction and links with insurance within the dual theory of decision. In the case of partial reduction, we get as Langlais (2005) that a risk-averse decision maker (DM) can have a willingness to pay small than this of a neutral one. By decomposition the WTP as Courbage and al (2008), we get that a strong averse DM is willing to give more for a reduction of a high probability portion rather than a low probability one. The main result is that in the dual theory, reducing probability of risk and supply insurance can be complementary if the surplus is increasing in risk reduction.
    Date: 2022–04
  6. By: Alfio Giarlotta; Angelo Petralia; Stephen Watson
    Abstract: We describe a context-sensitive model of choice, in which the selection process is shaped not only by the attractiveness of items but also by their semantics ('salience'). All items are ranked according to a relation of salience, and a linear order is associated to each item. The selection of a single element from a menu is justified by one of the linear orders indexed by the most salient items in the menu. The general model provides a structured explanation for any observed behavior, and allows us to to model the 'moodiness' of a decision maker, which is typical of choices requiring as many distinct rationales as items. Asymptotically all choices are moody. We single out a model of linear salience, in which the salience order is transitive and complete, and characterize it by a behavioral property, called WARP(S). Choices rationalizable by linear salience can only exhibit non-conflicting violations of WARP. We also provide numerical estimates, which show the high selectivity of this testable model of bounded rationality.
    Date: 2022–04
  7. By: Diego Carrasco-Novoa (School of Economics, University of Queensland, Brisbane, Australia); Allan Hernández-Chanto (School of Economics, University of Queensland, Brisbane, Australia)
    Abstract: We analyze security-bid auctions in which two risk-neutral sellers compete for riskaverse bidders. Sellers face a tradeoff in steepness because steeper securities extract more surplus but feature lower participation ex-ante. Nonetheless, steeper securities also provide higher insurance, making bidders more aggressive. We show that when bidders are homogeneously risk-averse, all equilibria are symmetric. Meanwhile, when they are heterogeneously risk-averse, there is always an equilibrium in which one seller chooses a steeper family to serve the more-risk-averse bidders, while the other chooses a flatter family to serve the less-risk-averse bidders. This result resembles a “Hotelling location” model in the steepness spectrum.
    Date: 2022–04
  8. By: Felix Brandt; Patrick Lederer; Warut Suksompong
    Abstract: Social decision schemes (SDSs) map the preferences of individual voters over multiple alternatives to a probability distribution over the alternatives. In order to study properties such as efficiency, strategyproofness, and participation for SDSs, preferences over alternatives are typically lifted to preferences over lotteries using the notion of stochastic dominance (SD). However, requiring strategyproofness or participation with respect to this preference extension only leaves room for rather undesirable SDSs such as random dictatorships. Hence, we focus on the natural but little understood pairwise comparison (PC) preference extension, which postulates that one lottery is preferred to another if the former is more likely to return a preferred outcome. In particular, we settle three open questions raised by Brandt (2017): (i) there is no Condorcet-consistent SDS that satisfies PC-strategyproofness; (ii) there is no anonymous and neutral SDS that satisfies PC-efficiency and PC-strategyproofness; and (iii) there is no anonymous and neutral SDS that satisfies PC-efficiency and strict PC-participation. All three impossibilities require m >= 4 alternatives and turn into possibilities when m
    Date: 2022–04
  9. By: Philipp Krug
    Abstract: Standard models on optimal estate taxation do not allow for intergenerational transmission of bequest motives. However, correlation in bequest motives may exist due to genetic and cultural transmission of preferences or indirect reciprocity. I introduce such intergenerational correlation to a simple model with heterogeneously altruistic parents. I derive two insights for optimal linear estate taxation under a Utilitarian welfare measure. First, this correlation implies a higher optimal estate tax rate. Second, estate tax rates should be higher for those parents who inherited themselves.
    Keywords: estate taxation, inheritance taxation, indirect reciprocity, intergenerational preference transmission
    JEL: H21 H24 D64
    Date: 2022–05
  10. By: Diane Pelly (UCD School of Economics & UCD Geary Institute for Public Policy, University College Dublin)
    Abstract: While the links between worker well-being and quit intentions have been well researched, most studies to date rely on a very narrow conceptualisation of well-being, namely job satisfaction, thus ignoring the documented multidimensionality of subjective well-being. This paper explores whether this approach is justified. Using novel survey data, I compare the extent to which hedonic (job satisfaction and affect) and eudemonic (disengagement and basic psychological needs) well-being indicators individually and jointly explain variation in the quit intentions of 994 full-time UK workers. Well-being indicators perform well, explaining four to nine times more variation in quit intentions than wages and hours combined, with the disengagement measure performing best. I find systematic differences in the hedonic and eudemonic well-being profiles of workers who report positive quit intentions and those who do not. A composite model containing all seven well-being indicators offers the best fit, explaining 29.4% of variation in quit intentions versus 24.0% for job satisfaction on its own. My findings suggest that the standard single-item job satisfaction indicator is probably good enough for organisations who are looking for a quick and easy way to identify workers who may be most at risk of forming positive quit intentions. For organisations seeking to develop effective preventative quit strategies however, supplementing single-item job satisfaction with multifaceted well-being indicators is likely to yield valuable additional insights.
    Keywords: voluntary turnover; quit intentions; employee retention; worker well-being; experienced utility; decision utility; job satisfaction; engagement; affect
    JEL: I31 J28 J22 J26 M5
    Date: 2022–05–17

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