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on Utility Models and Prospect Theory |
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Issue of 2022‒07‒25
seventeen papers chosen by |
| By: | Carlos Alós-Ferrer; Ernst Fehr; Michele Garagnani |
| Abstract: | Transitivity is perhaps the most fundamental choice axiom and, therefore, almost all economic models assume that preferences are transitive. The empirical literature has regularly documented violations of transitivity, but these violations pose little problem as long as they are simply a result of somewhat-noisy decision making and not a reflection of the deterministic part of individuals’ preferences. However, what if transitivity violations reflect individuals’ nontransitive preferences? And how can we separate nontransitive preferences from noise-generated transitivity violations–a problem that so far appears unresolved? Here we tackle these fundamental questions on the basis of a newly developed, non-parametric method which uses response times and choice frequencies to distinguish revealed preferences from noise. We extend the method to allow for nontransitive choices, enabling us to identify the share of weak stochastic transitivity violations that is due to nontransitive preferences. By applying the method to two different datasets, we document that a sizeable proportion of transitivity violations reflect nontransitive preferences. These violations cannot be accounted for by any noise or utility specification within the universe of random utility models. Finally, in spite of revealed transitivity violations, preferences estimated through our method predict choices out of sample better than standard parametric random-utility estimations. |
| Keywords: | Transitivity, stochastic choice, preference revelation, predicting choices |
| JEL: | D01 D81 D91 |
| Date: | 2022–07 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:415&r= |
| By: | Ali Elminejad (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Tomas Havranek (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic & CEPR); Zuzana Irsova (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | We collect 1,021 estimates from 92 studies that use the consumption Euler equation to measure relative risk aversion and that disentangle it from intertemporal substitution. We show that calibrations of risk aversion are typically larger than estimates thereof. Moreover, reported estimates are typically larger than the underlying risk aversion because of publica- tion bias. After correction for the bias, the literature suggests a mean risk aversion of 1 in economics and 2-7 in finance contexts. The reported estimates are systematically driven by the characteristics of data (frequency, dimension, country, stockholding) and utility (func- tional form, treatment of durables). To obtain these results we use nonlinear techniques to correct for publication bias and Bayesian model averaging techniques to account for model uncertainty. |
| Keywords: | Euler equation, risk aversion, Epstein-Zin preferences, meta-analysis, publication bias, Bayesian model averaging |
| JEL: | C83 D81 D90 |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2022_14&r= |
| By: | Jonathan Chapman; Erik Snowberg; Stephanie Wang; Colin Camerer |
| Abstract: | We measure individual-level loss aversion using three incentivized, representative surveys of the U.S. population (combined N = 3,000). We find that around 50% of the U.S. population is loss tolerant, with many participants accepting negative-expected-value gambles. This is counter to earlier findings−which mostly come from lab/student samples−and expert predictions that 70-90% of participants are loss averse. Consistent with the difference between our study and the prior literature, loss aversion is more prevalent in people with high cognitive ability. Loss-tolerant individuals are more likely to report recent gambling and to have experienced financial shocks. These results support the general hypothesis that individuals value gains and losses differently, although the tendency in a large proportion of the population to emphasize gains over losses is an overlooked behavioral phenomenon. |
| Keywords: | loss aversion, DOSE, risk preferences, cognitive ability, negative shocks, gambling |
| JEL: | C81 C90 D03 D81 D90 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9820&r= |
| By: | Kirill Borissov; Mikhail Pakhnin; Ronald Wendner |
| Abstract: | We consider a neoclassical growth model with quasi-hyperbolic discounting under Kantian optimization: each temporal self acts in a way that they would like every future self to act. We introduce the notion of a Kantian policy as an outcome of Kantian optimization in a given class of policies. We derive and characterize a Kantian policy in the class of policies with a constant saving rate for an economy with log-utility and Cobb–Douglas production technology and an economy with isoelastic utility and linear production technology. In all cases, the Kantian saving rate is higher than the saving rate of sophisticated agents, and a Kantian path Pareto dominates a sophisticated path. |
| Keywords: | quasi-hyperbolic discounting, time inconsistency, Kantian equilibrium, sophisticated agents, saving rate, welfare |
| JEL: | C70 D15 D91 E21 O40 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9790&r= |
| By: | Thomas Daske; Christoph March |
| Abstract: | This study explores mechanism design with allocation-based social preferences. Agents’ social preferences and private payoffs are all subject to asymmetric information. We assume quasi-linear utility and independent types. We show how the asymmetry of information about agents’ social preferences can be operationalized to satisfy agents’ participation constraints. Our main result is a possibility result for groups of at least three agents: If endowments are sufficiently large, any such group can resolve any given allocation problem with an ex-post budget-balanced mechanism that is Bayesian incentive-compatible, interim individually rational, and ex-post Pareto-efficient. |
| Keywords: | mechanism design, social preferences, Bayesian implementation, participation constraints, participation stimulation |
| JEL: | C72 C78 D62 D82 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9784&r= |
| By: | Claudia Kelsall (CEE-M - Centre d'Economie de l'Environnement - Montpellier - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - Institut Agro Montpellier - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement, iDiv - German Centre for Integrative Biodiversity Research); Martin F Quaas (iDiv - German Centre for Integrative Biodiversity Research); Nicolas Quérou (CEE-M - Centre d'Economie de l'Environnement - Montpellier - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - Institut Agro Montpellier - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement) |
| Abstract: | We study optimal harvesting of a renewable resource with stochastic dynamics. To focus on the effect of risk aversion, we consider a resource user who is indifferent with respect to intertemporal variability. We find that a constant escapement strategy is optimal, i.e. the stock after harvesting is constant. Under common specifications of risk aversion, increasing risk and risk aversion increase current resource use, the reason being a substitution effect, i.e. the resource user substitutes assets away from the risky resource stock. We apply the model to the case of the Eastern Baltic cod fishery and, in contrast to the previous literature, find a strong effect of risk and risk aversion on optimal harvesting. |
| Keywords: | Resource Economics,Investment under Uncertainty,Risk Aversion,Prudence,Precautionary Savings |
| Date: | 2022–06–16 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03696726&r= |
| By: | David Desmarchelier; Magali Jaoul-Grammare; Guillaume Morel; Thi Kim Cuong Pham |
| Abstract: | This paper develops a competitive Ramsey-Cass-Koopmans 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) symptomatic and (2) asymptomatic. While the former is assumed to be too ill to work, the latter supply their labor and spread the disease. The government imposes a lockdown as an instrument to control the disease spread. In the longrun, 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 steady-state, 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 (Bogdanov-Takens bifurcation). In this sense, the lockdown allows hitting two birds with one stone. |
| Keywords: | Bogdanov-Takens bifurcation, Hopf bifurcation, Lockdown, Ramsey model, SIS model |
| JEL: | C61 E13 I18 O41 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2022-14&r= |
| By: | Geoffrey Pritchard; Mark C. Wilson |
| Abstract: | We make a detailed analysis of three key algorithms (Serial Dictatorship and the naive and adaptive variants of the Boston algorithm) for the housing allocation problem, under the assumption that agent preferences are chosen iid uniformly from linear orders on the items. We compute limiting distributions (with respect to some common utility functions) as $n\to \infty$ of both the utilitarian welfare and the order bias. To do this, we compute limiting distributions of the outcomes for an arbitrary agent whose initial relative position in the tiebreak order is $\theta\in[0,1]$, as a function of $\theta$. The results for the Boston algorithms are all new, and we expect that these fundamental results on the stochastic processes underlying these algorithms will have wider applicability in future. Overall our results show that the differences in utilitarian welfare performance of the three algorithms are fairly small but still important. However, the differences in order bias are much greater. Also, Naive Boston beats Adaptive Boston, which beats Serial Dictatorship, on both utilitarian welfare and order bias. |
| Date: | 2022–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2205.15418&r= |
| By: | Clark, Andrew; Mihailov, Alexander; Zargham, Michael |
| Abstract: | This paper proposes a complex dynamic system subpopulation model for the construction and validation of a novel form of local complementary currency, namely the Grassroots Economics Foundation’s Community Inclusion Currency (CIC) implemented recently in Kenya. First, we highlight that CICs can act as a local liquidity-provision institutional device in poor or isolated economic regions, thereby serving as a market-based mechanism to alleviate poverty. Second, we elicit 50 heterogeneous utility types according to observed transactions behavior in our rich data set, i.e., via revealed – and recorded – preferences, and build a corresponding model and simulation at a meso-economic level. |
| Keywords: | Community Inclusion Currencies, Blockchain Technologies, Poverty Alleviation, Eliciting Utility Types, Complex Dynamic Systems, Subpopulation Simulation |
| Date: | 2022–07–08 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wus051:8664&r= |
| By: | Mohammad Abu‐zaineh (AMSE - Aix-Marseille 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, SMPM - Faculty of Medical and Paramedical Sciences, School of Public Administration and Development Economics, Doha Institute for Graduate Studies); Olivier Chanel (AMSE - Aix-Marseille 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); Khaled Makhloufi (SESSTIM - U1252 INSERM - Aix Marseille Univ - UMR 259 IRD - Sciences Economiques et Sociales de la Santé & Traitement de l'Information Médicale - IRD - Institut de Recherche pour le Développement - AMU - Aix Marseille Université - INSERM - Institut National de la Santé et de la Recherche Médicale) |
| Abstract: | Introduction: Developing countries face major challenges in implementing universal health coverage (UHC): a widespread informal sector, general discontent with rising economic insecurity and inequality and the rollback of state and public welfare. Under such conditions, estimating the demand for a health insurance scheme (HIS) on voluntary basis can be of interest to accelerate the progress of UHC-oriented reforms. However, a major challenge that needs to be addressed in such context is related to protest attitudes that may reflect, inter alia, a null valuation of the expected utility or unexpressed demand. Methods: We propose to tackle this by applying a contingent valuation survey to a non-healthcare-covered Tunisian sample vis-à-vis joining and paying for a formal HIS. Our design pays particular attention to identifying the nature of the willingness-to-pay (WTP) values obtained, distinguishing genuine null values from protest values. To correct for potential selection issues arising from protest answers, we estimate an ordered-Probit-selection model and compare it with the standard Tobit and Heckman sample selection models. Results: Our results support the presence of self-selection and, by predicting protesters' WTP, allow the "true" sample mean WTP to be computed. This appears to be about 14% higher than the elicited mean WTP. Conclusion: The WTP of the poorest non-covered respondents represents about one and a half times the current contributions of the poorest formal sector enrolees, suggesting that voluntary participation in the formal HIS is feasible. |
| Date: | 2022–05–23 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03684923&r= |
| By: | Weijie J. Su |
| Abstract: | Alice (owner) has knowledge of the underlying quality of her items measured in grades. Given the noisy grades provided by an independent party, can Bob (appraiser) obtain accurate estimates of the ground-truth grades of the items by asking Alice a question about the grades? We address this when the payoff to Alice is additive convex utility over all her items. We establish that if Alice has to truthfully answer the question so that her payoff is maximized, the question must be formulated as pairwise comparisons between her items. Next, we prove that if Alice is required to provide a ranking of her items, which is the most fine-grained question via pairwise comparisons, she would be truthful. By incorporating the ground-truth ranking, we show that Bob can obtain an estimator with the optimal squared error in certain regimes based on any possible way of truthful information elicitation. Moreover, the estimated grades are substantially more accurate than the raw grades when the number of items is large and the raw grades are very noisy. Finally, we conclude the paper with several extensions and some refinements for practical considerations. |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2206.08149&r= |
| By: | Sudhölter, Peter (Department of Economics); Grabisch, Michel (Paris School of Economics, Université Paris); Laplace Mermoud, Dylan (Paris School of Economics, Université Paris) |
| Abstract: | We describe algorithms and their implementations as computer programs derived from several theoretical results of the theory of cooperative transferable utility (TU) games. We show how to use Peleg’s well-known inductive method to explicitly compute all minimal balanced collections of coalitions. The described method is of independent interest and applied in the implementations of (a) the Bondareva-Shapley Theorem, which allows checking whether a TU game is balanced, i.e., has a non-empty core, and (b) a recent result of the second and third author that provides a sufficient and necessary condition for the stability of the core, which allows checking whether a balanced TU game has a core that is a von Neumann-Morgenstern stable set. |
| Keywords: | Core; stable set; minimal balanced collections; cooperative game. |
| JEL: | C44 C71 |
| Date: | 2022–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sdueko:2022_004&r= |
| By: | Jerome Garnier-Brun; Jean-Philippe Bouchaud; Michael Benzaquen |
| Abstract: | The Slutsky equation, central in consumer choice theory, is derived from the usual hypotheses underlying most standard models in Economics, such as full rationality, homogeneity, and absence of interactions. We present a statistical physics framework that allows us to relax such assumptions. We first derive a general fluctuation-response formula that relates the Slutsky matrix to spontaneous fluctuations of consumption rather than to response to changing prices and budget. We then show that, within our hypotheses, the symmetry of the Slutsky matrix remains valid even when agents are only boundedly rational but non-interacting. We then propose a model where agents are influenced by the choice of others, leading to a phase transition beyond which consumption is dominated by herding (or `"fashion") effects. In this case, the individual Slutsky matrix is no longer symmetric, even for fully rational agents. The vicinity of the transition features a peak in asymmetry. |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2206.04468&r= |
| By: | Fumagalli, Roberto |
| Abstract: | The critics of rational choice theory (henceforth, RCT) frequently claim that RCT is self-defeating in the sense that agents who abide by RCT’s prescriptions are less successful in satisfying their preferences than they would be if they abided by some normative theory of choice other than RCT. In this paper, I combine insights from philosophy of action, philosophy of mind and the normative foundations of RCT to rebut this often-made criticism. I then explicate the implications of my thesis for the wider philosophical debate concerning the normativity of RCT for both ideal agents who can form and revise their intentions instantly without cognitive costs and real-life agents who have limited control over the formation and the dynamics of their own intentions. |
| Keywords: | decision-making; intentions; normativity; preference satisfaction; rationality |
| JEL: | J1 |
| Date: | 2021–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:112446&r= |
| By: | Pawel Zabczyk; Marcin Kolasa; Sahil Ravgotra |
| Abstract: | We develop an extension of the open economy New Keynesian model in which agents are boundedly rational à la Gabaix (2020). Our setup nests rational expectations (RE) as a special case and it can successfully mitigate many “puzzling” aspects of the relationship between exchange rates and interest rates. Since the model implies an uncovered interest rate parity (UIP) condition featuring behavioral expectations, our results are also consistent with recent empirical evidence showing that several UIP puzzles vanish when actual exchange rate expectations are used (instead of realizations implicitly coupled with the RE assumption). We find that cognitive discounting dampens the effects of current monetary shocks and lowers the efficacy of forward guidance (FG), but its relative importance in mitigating the so-called FG puzzle is decreasing in openness. Finally, we show that accounting for myopia exacerbates the small open economy unit-root problem, makes positive monetary spillovers more likely, and increases the persistence of net foreign assets and the real exchange rate. |
| Keywords: | Monetary Policy; Exchange Rates; Bounded Rationality |
| Date: | 2022–06–03 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2022/112&r= |
| By: | Lise Clain-Chamosset-yvrard (UL2 - Université Lumière - Lyon 2); Xavier Raurich (University of Barcelona, Department of Economics); Thomas Seegmuller (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | We provide a unified framework with demand for housing over the life cycle and financial frictions to analyze the existence and macroeconomic effects of rational housing bubbles. We distinguish a housing price bubble, defined as the difference between the housing market price and its fundamental value, from a housing demand bubble, which corresponds to a situation where a pure speculative housing demand exists. In an overlapping generation exchange economy, we show that no housing price bubble occurs. However, a housing demand bubble may occur, generating a boom in housing prices and a drop in the interest rate, when households face a binding borrowing constraint. Multiplicity of steady states and endogenous fluctuations can occur when credit market imperfections are moderate. These fluctuations involve transitions between equilibria with and without a housing demand bubble that generate large fluctuations in housing prices consistent with observed patterns. We finally extend the basic framework to a production economy and we show that a housing demand bubble increases the housing price, housing price to income ratio and economic growth. |
| Keywords: | Bubble,Housing,Self-fulfilling fluctuations |
| Date: | 2022–06–16 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03703219&r= |
| By: | Marie-Louise Leroux; Pierre Pestieau; Grégory Ponthière |
| Abstract: | This paper studies the optimal design of assisted reproductive technologies (ART) policies in an economy where individuals differ in their reproductive capacity (or fecundity) and in their wage. We find that the optimal ART policy varies with the postulated social welfare criterion. Utilitarianism redistributes only between individuals with unequal fecundity and wages but not between parents and childless individuals. To the opposite, ex post egalitarianism (which gives absolute priority to the worst-off in realized terms) redistributes from individuals with children toward those without children, and from individuals with high fecundity toward those with low fecundity, so as to compensate for both the monetary cost of ART and for the disutility from involuntary childlessness resulting from unsuccessful ART investments. Under asymmetric information and in order to solve for the incentive problem, utilitarianism recommends also to either tax or subsidize ART investments of low-fecundity-low productivity individuals depending on the degree of complementarity between fecundity and ART in the fertility technology. On the opposite, ex post egalitarianism always recommends marginal taxation. Cet article étudie la conception optimale des politiques de procréation médicalement assistée (PMA) dans une économie où les individus diffèrent dans leur capacité de reproduction (ou fécondité) et dans leur salaire. Nous constatons que la politique optimale en matière de PMA varie en fonction du critère de bien-être social considéré. L'utilitarisme opère une redistribution uniquement entre les individus dont la fécondité et le salaire sont inégaux, mais pas entre les parents et les individus sans enfant. Au contraire, l'égalitarisme ex-post (qui donne la priorité absolue aux personnes les plus mal loties en termes de réalisation) redistribue des individus ayant des enfants vers ceux qui n'en ont pas, et des individus à forte fécondité vers ceux à faible fécondité, de manière à compenser à la fois le coût monétaire des PMA et la désutilité liée à l'absence involontaire d'enfants résultant d'investissements infructueux dans les PMA. En cas d'asymétrie d'information et afin de résoudre les problèmes d’incitation, l'utilitarisme recommande également de taxer ou de subventionner les investissements en PMA des individus à faible fécondité et faible productivité, en fonction du degré de complémentarité entre fécondité et investissements en PMA dans la technologie de fertilité. A l'inverse, l'égalitarisme ex-post recommande toujours la taxation marginale. |
| Keywords: | fertilité,technologies de reproduction assistéé,fiscalité non linéaire,idéologie utilitariste,égalitarisme ex post, fertility,assisted reproductive technologies,non-linear taxation,utilitarianism,ex-post egalitarianism |
| JEL: | H31 H51 I14 I18 J13 |
| Date: | 2022–06–23 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2022s-19&r= |