nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2022‒11‒28
fourteen papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Optimal Consumption for Recursive Preferences with Local Substitution - the Case of Certainty By Li, Hanwu; Riedel, Frank; Yang, Shuzhen
  2. Average monotonic cooperative games with nontransferable utility By Sudhölter, Peter; Giménez-Gómez, José-Manuel; Vilella, Cori
  3. Relative Risk Aversion: A Meta-Analysis By Elminejad, Ali; Havranek, Tomas; Irsova, Zuzana
  4. Optimal investment and reinsurance under exponential forward preferences By Katia Colaneri; Alessandra Cretarola; Benedetta Salterini
  5. Valuing Excess Deaths Caused by Climate Change By R. Daniel Bressler; Geoffrey Heal
  6. Time-Use and Subjective Well-Being: Is there a Preference for Activity Diversity? By Naomi Friedman-Sokuler; Claudia Senik
  7. Persuasion without Priors By Alexei Parakhonyak; Anton Sobolev
  8. Connecting the Dots: Loss Aversion, Sybil Attacks, and Welfare Maximization By Yotam Gafni; Moshe Tennenholtz
  9. Two-Player Bargaining Problems with Unilateral Pre-donation By Saglam, Ismail
  10. Information Design in Allocation with Costly Verification By Yi-Chun Chen; Gaoji Hu; Xiangqian Yang
  11. Running Primary Deficits Forever in a Dynamically Efficient Economy: Feasibility and Optimality By Andrew B. Abel; Stavros Panageas
  12. Efficient Allocations under Ambiguous Model Uncertainty By Chiaki Hara; Sujoy Mukerji; Frank Riedel; Jean-Marc Marc Tallon
  13. Group Representation Concerns and Network formation By Melguizo, Isabel
  14. The Costs and Environmental Justice Concerns of NIMBY in Solid Waste Disposal By Ho, Phuong

  1. By: Li, Hanwu (Center for Mathematical Economics, Bielefeld University); Riedel, Frank (Center for Mathematical Economics, Bielefeld University); Yang, Shuzhen (Center for Mathematical Economics, Bielefeld University)
    Abstract: We characterize optimal consumption policies in a recursive intertemporal utility framework with local substitution. We establish existence and uniqueness and a version of the Kuhn-Tucker theorem characterizing the optimal consumption plan. An explicit solution is provided for the case when the felicity function is of the Epstein-Zin’s type.
    Keywords: Recursive utility, Hindy-Huang-Kreps preference, Intertemporal Substitution, Utility maximization
    Date: 2022–11–16
  2. By: Sudhölter, Peter (Department of Economics); Giménez-Gómez, José-Manuel (Universitat Rovira i Virgili); Vilella, Cori (Universitat Rovira i Virgili)
    Abstract: A non-negative transferable utility (TU) game is average monotonic if there exists a non-negative allocation according to which the relative worth is not decreasing when enlarging the coalition. We generalize this definition to the nontransferable utility (NTU) case. It is shown that an average monotonic NTU game shares several properties with an average monotonic TU game. In particular it has a special core element and there exists a population monotonic allocation scheme. We show that an NTU bankruptcy game is average monotonic with respect to the claims vector.
    Keywords: nontransferable utility; average monotonicity; core; population monotonicity
    JEL: C71
    Date: 2022–10–29
  3. By: Elminejad, Ali; Havranek, Tomas; Irsova, Zuzana
    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 publication 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 (functional 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.
    Date: 2022–06–27
  4. By: Katia Colaneri; Alessandra Cretarola; Benedetta Salterini
    Abstract: We study the optimal investment and proportional reinsurance problem of an insurance company, whose investment preferences are described via a forward dynamic utility of exponential type in a stochastic factor model allowing for a possible dependence between the financial and insurance markets. Specifically, we assume that the asset price process dynamics and the claim arrival intensity are both affected by a common stochastic process and we account for a possible environmental contagion effect through the non-zero correlation parameter between the underlying Brownian motions driving the asset price process and the stochastic factor dynamics. By stochastic control techniques, we construct a forward dynamic exponential utility, and we characterize the optimal investment and reinsurance strategy. Moreover, we investigate in detail the zero-volatility case and provide a comparison analysis with classical results in an analogous setting under backward utility preferences. We also discuss an extension of the conditional certainty equivalent. Finally, we perform a numerical analysis to highlight some features of the optimal strategy.
    Date: 2022–10
  5. By: R. Daniel Bressler; Geoffrey Heal
    Abstract: Valuing deaths caused by climate change in Benefit Cost Analysis (BCA) is complex and controversial, having caused disagreement and acrimony in past high-profile settings. Furthermore, it is of first order consequence to the value of the social cost of carbon (SCC). Despite this, the underlying considerations remain under-analyzed. We address this by assessing the theory behind different approaches to BCA, and by evaluating how they fare when applied to global externalities like climate change. The pure Kaldor-Hicks approach to BCA – measuring costs in market dollars unadjusted for diminishing marginal utility and valuing premature deaths in rich areas more than poor areas – relies on assumptions that are debated in domestic contexts, but, as we show, clearly do not hold in the context of climate change. We show that this approach is equivalent to defining a Negishi weighted social welfare function. Furthermore, we show that if costs are measured in purchasing power parity adjusted money – as is typical for the SCC – then the Kaldor-Hicks potential compensation criterion no longer necessarily holds. We conclude that the first-best BCA approach in the climate context is welfare weighting. This approach accounts for diminishing marginal utility using empirical estimates for the curvature of the utility function, and it better captures what a social planner naturally cares about: real net benefits and the welfare people get from those net benefits. The current U.S. practice – identical to the pure Kaldor-Hicks approach except that it gives a uniform population average value to all premature deaths – is preferred over the pure Kaldor-Hicks approach because it implicitly welfare weights premature mortality costs. However, the fully welfare weighted approach is first-best because it accounts for diminishing marginal utility across all costs, not just premature mortality risk.
    JEL: H00 Q00
    Date: 2022–11
  6. By: Naomi Friedman-Sokuler (Bar-Ilan University [Israël]); Claudia Senik (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - 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, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - 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, SU - Sorbonne Université)
    Abstract: Using the American and the French time-use surveys, we examine whether people have a preference for a more diversified mix of activities, in the sense that, everything else equal, they experience a higher level of well-being when their agenda is multi-activity, rather than concentrated on a very small number of activities. This could be due to decreasing marginal utility, as is assumed for the consumption of goods, if each episode of time is conceived as yielding a certain level of utility per se. However, in the presence of returns to specialization, people would face a trade-off between the efficiency of specialization and the taste for diversity, as concerns time arrangements. We test these hypotheses and investigate potential gender differences with regard to these patterns.
    Keywords: Time allocation,Time-use diversity,Subjective well-being,Life satisfaction,Momentary utility,Gender Time allocation,Gender
    Date: 2022–10
  7. By: Alexei Parakhonyak; Anton Sobolev
    Abstract: We consider an information design problem when the sender faces ambiguity regarding the probability distribution over the states of the world, the utility function and the prior of the receiver. The solution concept is minimax loss (regret), that is, the sender minimizes the distance from the full information benchmark in the worst-case scenario. We show that in the binary states and binary actions setting the optimal strategy involves a mechanism with a continuum of messages, which admits a representation as a randomization over mechanisms consisting of two messages. A small level of uncertainty regarding the receiver’s prior makes the sender more truthful than in the full information benchmark, but as uncertainty increases at some point the sender starts to lie more. If the sender either knows the probability distribution over the states of the world, or knows that the receiver knows it, then the maximal loss is bounded from above by 1/e. This result generalizes to an infinite state model, provided that the set of admissible mechanisms is limited to cut-off strategies.
    Date: 2022–07–05
  8. By: Yotam Gafni; Moshe Tennenholtz
    Abstract: A celebrated known cognitive bias of individuals is that the pain of losing is psychologically higher than the pleasure of gaining. In robust decision making under uncertainty, this approach is typically associated with the selection of safety (aka security) level strategies. We consider a refined notion, which we term loss aversion, capturing the fact that when comparing two actions an agent should not care about payoffs in situations where they lead to identical payoffs, removing trivial equivalencies. We study the properties of loss aversion, its relations to other robust notions, and illustrate its use in auctions and other settings. Moreover, while loss aversion is a classical cognitive bias on the side of decision makers, the problem of economic design is to maximize social welfare when facing self-motivated participants. In online environments, such as the Web, participants' incentives take a novel form originating from the lack of clear agent identity -- the ability to create Sybil attacks, i.e., the ability of each participant to act using multiple identities. It is well-known that Sybil attacks are a major obstacle for welfare-maximization. Our major result proves that the celebrated VCG mechanism is welfare maximizing when agents are loss-averse, even under Sybil attacks. Altogether, our work shows a successful fundamental synergy between cognitive bias/robustness under uncertainty, economic design, and agents' strategic manipulations in online multi-agent systems.
    Date: 2022–10
  9. By: Saglam, Ismail
    Abstract: This paper characterizes conditions for two-player bargaining problems and bargaining rules under which unilateral pre-donation always yields Pareto utility gains. The paper also computes the optimal pre-donation of each player under the class of proportional bargaining rules.
    Keywords: Cooperative bargaining; pre-donation.
    JEL: C78
    Date: 2022–10–29
  10. By: Yi-Chun Chen; Gaoji Hu; Xiangqian Yang
    Abstract: A principal who values an object allocates it to one or more agents. Agents learn private information (signals) from an information designer about the allocation payoff to the principal. Monetary transfer is not available but the principal can costly verify agents' private signals. The information designer can influence the agents' signal distributions, based upon which the principal maximizes the allocation surplus. An agent's utility is simply the probability of obtaining the good. With a single agent, we characterize (i) the agent-optimal information, (ii) the principal-worst information, and (iii) the principal-optimal information. Even though the objectives of the principal and the agent are not directly comparable, we find that any agent-optimal information is principal-worst. Moreover, there exists a robust mechanism that achieves the principal's payoff under (ii), which is therefore an optimal robust mechanism. Many of our results extend to the multiple-agent case; if not, we provide counterexamples.
    Date: 2022–10
  11. By: Andrew B. Abel; Stavros Panageas
    Abstract: Government debt can be rolled over forever without primary surpluses in some stochastic economies, including some economies that are dynamically efficient. In an overlapping-generations model with constant growth rate, g, of labor-augmenting productivity, and with shocks to the durability of capital, we show that along a balanced growth path, the maximum sustainable ratio of bonds to capital is attained when the riskfree interest rate, r[sub]f, equals g. Furthermore, this maximal ratio maximizes utility per capita along a balanced growth path and ensures that the economy is dynamically efficient.
    JEL: E0 E6 H60
    Date: 2022–10
  12. By: Chiaki Hara (Kyoto University [Kyoto]); Sujoy Mukerji (QMUL - Queen Mary University of London); Frank Riedel (University of Bielefeld); Jean-Marc Marc Tallon (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - 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, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - 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: We investigate consequences of ambiguity on efficient allocations in an exchange economy. Ambiguity is embodied in the model uncertainty perceived by the consumers: they are unsure what would be the appropriate probability measure to apply to evaluate consumption and keep in consideration a set P of alternative probabilistic laws. Consumers are heterogeneously ambiguity averse with smooth
    Date: 2022–10
  13. By: Melguizo, Isabel
    Abstract: This paper studies processes of integration and segregation using a connections model in which individuals form valuable links that also entail a cost. Individuals belong to two different groups and care about whether their own group represents a sufficient fraction in their neighborhood. Concerns for representation promote the segregation of societies as even for small linking costs individuals do not link to different others because of the threat that their group become under-represented. For certain cost ranges, concerns for representation also determine efficient networks because forming links with members of the opposite group entails a utility loss due to under-representation.
    Keywords: integration, segregation, representation concerns, homophily, welfare, pairwise stability
    JEL: D6 D85 Z13
    Date: 2022–02–08
  14. By: Ho, Phuong
    Abstract: Many recent US Congresses have proposed bills that allow state and local governments to restrict interjurisdictional waste shipments. Using data on intercounty waste flows in California and a random utility model of haulers' decisions about where to deposit waste from each county, this paper studies the economic costs of import bans and import taxes and the implications on the distribution of waste disposal by race (and ethnicity). I find NIMBY-motivated laws would reduce intercounty waste transport at substantial economic costs. Furthermore, a NIMBY law enacted in a county, despite reducing the county's imports, could increase total intercounty waste in the whole state, generating additional external costs of transportation. A universal import ban in all counties would reduce transboundary waste but it would lead to substitution of waste away from facilities near white residents and toward facilities near Hispanic residents, exacerbating distributional concerns.
    Date: 2022–10–25

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