nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2022‒12‒19
fifteen papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Optimal investment and consumption under logarithmic utility and uncertainty model By Wahid Faidi
  2. An Ellsberg paradox for ambiguity aversion By Christoph Kuzmics; Brian W. Rogers; Xiannong Zhang
  3. Revenue Comparisons of Auctions with Ambiguity Averse Sellers By Sosung Baik; Sung-Ha Hwang
  4. Multi-object Auction Design Beyond Quasi-linearity: Leading Examples By Yu Zhou; Shigehiro Serizawa
  5. Optimal Pricing Schemes in the Presence of Social Learning and Costly Reporting By Kaiwei Zhang; Xi Weng
  6. Optimal investment with insider information using Skorokhod & Russo-Vallois integration By Mauricio Elizalde; Carlos Escudero; Tomoyuki Ichiba
  7. Efficiency, durability and ordinality in 2-person bargaining with incomplete information By Eric van Damme; Xu Lang
  8. Stable and metastable contract networks By Danilov, Vladimir; Karzanov, Alexander
  9. Differentiation Strategy for Firms: Online Ad versus Mass Media Ad By Fujisawa, Chieko; Kasuga, Norihiro
  10. The Future Economics of Artificial Intelligence: Mythical Agents, a Singleton and the Dark Forest By Naudé, Wim
  11. Housing Prices and Credit Constraints in Competitive Search By Antonia Díaz; Belén Jerez; Juan P. Rincón-Zapatero
  12. The debt aversion survey module: An experimentally validated tool to measure individual debt aversion By David Albrecht; Thomas Meissner
  13. Indirect Consumer Inflation Expectations: Theory and Evidence By Ina Hajdini; Edward S. Knotek; John Leer; Mathieu Pedemonte; Robert W. Rich; Raphael Schoenle
  14. Optimal consumption-investment with coupled constraints on consumption and investment strategies in a regime switching market with random coefficients By Ying Hu; Xiaomin Shi; Zuo Quan Xu
  15. Does the framing affect the WTP for consumption goods in realistic shopping settings? By Magdalena Brzozowicz

  1. By: Wahid Faidi
    Abstract: We study a robust utility maximization problem in the case of an incomplete market and logarithmic utility with general stochastic constraints, not necessarily convex. Our problem is equivalent to maximizing of nonlinear expected logarithmic utility. We characterize the optimal solution using quadratic BSDE.
    Date: 2022–11
  2. By: Christoph Kuzmics (University of Graz, Austria); Brian W. Rogers (Washington University in St. Louis, U.S.A.); Xiannong Zhang (Washington University in St. Louis, U.S.A.)
    Abstract: The 1961 Ellsberg paradox is typically seen as an empirical challenge to the subjective expected utility framework. Experiments based on Ellsberg's design have spawned a variety of new approaches, culminating in a new paradigm represented by, now classical, models of ambiguity aversion. We design and implement a decision-theoretic lab experiment that is extremely close to the original Ellsberg design and in which, empirically, subjects make choices very similar to those in the Ellsberg experiments. In our environment, however, these choices cannot be rationalized by any of the classical models of ambiguity aversion.
    Keywords: Knightian uncertainty; subjective expected utility; ambiguity aversion; lab experiment.
    JEL: C91 D81
    Date: 2022–12
  3. By: Sosung Baik; Sung-Ha Hwang
    Abstract: We study the revenue comparison problem of auctions when the seller has a maxmin expected utility preference. The seller holds a set of priors around some reference belief, interpreted as an approximating model of the true probability law or the focal point distribution. We develop a methodology for comparing the revenue performances of auctions: the seller prefers auction X to auction Y if their transfer functions satisfy a weak form of the single-crossing condition. Intuitively, this condition means that a bidder's payment is more negatively associated with the competitor's type in X than in Y. Applying this methodology, we show that when the reference belief is independent and identically distributed (IID) and the bidders are ambiguity neutral, (i) the first-price auction outperforms the second-price and all-pay auctions, and (ii) the second-price and all-pay auctions outperform the war of attrition. Our methodology yields results opposite to those of the Linkage Principle.
    Date: 2022–11
  4. By: Yu Zhou; Shigehiro Serizawa
    Abstract: In multi-object auction models with unitary demand agents, if agents' utility functions satisfy quasi-linearity, three auction formats, sealed-bid auction, exact ascending auction, and approximate ascending auction, are known to identify the minimum price equilibrium (MPE), and exhibit elegant efficiency and incentive-compatibility. These auctions are conjured to preserve their properties beyond quasi-linearity. Nevertheless, we exemplify that with general utility functions, these auctions fail to identify the MPEs and are substantially inefficient and manipulatable. The implications of our negative results for multi-object auction models with agents with multi-unit demand, and matching with contracts models are also discussed.
    Date: 2021–01
  5. By: Kaiwei Zhang; Xi Weng
    Abstract: A monopoly platform sells either a risky product (with unknown utility) or a safe product (with known utility) to agents who sequentially arrive and learn the utility of the risky product by the reporting of previous agents. It is costly for agents to report utility; hence the platform has to design both the prices and the reporting bonus to motivate the agents to explore and generate new information. We characterize the optimal bonus and pricing schemes offered by the profit-maximizing platform. It turns out that the optimal scheme falls into one of four types: Full Coverage, Partial Coverage, Immediate Revelation, and Non-Bonus. In a model of exponential bandit, we find that there is a dynamical switch of the types along the learning trajectory. Although learning stops efficiently, information is revealed too slowly compared with the planner's optimal solution.
    Date: 2022–11
  6. By: Mauricio Elizalde; Carlos Escudero; Tomoyuki Ichiba
    Abstract: We study the maximization of the logarithmic utility of an insider with different anticipating techniques. Our aim is to compare the usage of the forward and Skorokhod integrals in this context with multiple assets. We show theoretically and with simulations that the Skorokhod insider always overcomes the forward insider, just the opposite of what happens in the case of risk-neutral traders. Moreover, an ordinary trader might overcome both insiders if there is a large enough negative fluctuation in the driving stochastic process that leads to a negative enough final value. Our results point to the fact that the interplay between anticipating stochastic calculus and nonlinear utilities might yield non-intuitive results from the financial viewpoint.
    Date: 2022–11
  7. By: Eric van Damme; Xu Lang
    Abstract: We consider two-person bargaining problems in which (only) the players' disagreement payoffs are private information and it is common knowledge that disagreement is inefficient. We show that if the Pareto frontier is linear, or the utility functions are quasi-linear, the outcome of an ex post efficient mechanism must be independent of the players' disagreement values. Hence, in this case, a bargaining solution must be ordinal: the players' interim expected utilities cannot depend on the intensity of their preferences. For a non-linear frontier, the result continues to hold if disagreement payoffs are independent or if one of the players only has a few types. We discuss implications of these results for axiomatic bargaining theory and for full surplus extraction in mechanism design.
    Date: 2022–11
  8. By: Danilov, Vladimir; Karzanov, Alexander
    Abstract: We consider a hypergraph (I, C), with possible multiple (hyper)edges and loops, in which the vertices i ∈ I are interpreted as agents, and the edges c ∈ C as contracts that can be concluded between agents. The preferences of each agent i concerning the contracts where i takes part are given by use of a choice function fi possessing the so-called path independent property. In this general setup we introduce the notion of stable network of contracts. The paper contains two main results. The first one is that a general problem on stable systems of contracts for (I, C, f) is reduced to a set of special ones in which preferences of agents are described by use of so-called weak orders, or utility functions. However, for a special case of this sort, the stability may not exist. Trying to overcome this trouble when dealing with such special cases, we introduce a weaker notion of metastability for systems of contracts. Our second result is that a metastable system always exists.
    Keywords: Plott choice functions, Aizerman-Malishevski theorem, stable marriage, roommate problem, Scarf lemma
    JEL: C71 C78 D74
    Date: 2022–11–29
  9. By: Fujisawa, Chieko; Kasuga, Norihiro
    Abstract: This study analyzes advertiser firms' product differentiation strategies and the relationship two media advertising effect, mass media and online media. We derive an inverse demand function from the utility function relating to the evaluation of the goods' additional information that consumers obtain from advertisements, and we analyze the advertising choices of firms using a two-stage decision-making model. The analysis results indicate that firms choose asymmetric advertising to take advantage of the interdependent effects of two advertising and differentiation and to increase profit through rivals' advertising effects. However, the profits of firms are the highest when both firms choose the discriminatory online media advertising. Social welfare is highest in symmetric choice of the discriminatory online advertising, but consumer surplus is highest in symmetric choice of the discriminatory mass media advertising.
    Keywords: Online media advertising,Mass media advertising,Targeting,Differentiation Strategy,Interaction
    Date: 2022
  10. By: Naudé, Wim (RWTH Aachen University)
    Abstract: This paper contributes to the economics of AI by exploring three topics neglected by economists: (i) the notion of a Singularity (and Singleton), (ii) the existential risks that AI may pose to humanity, including that from an extraterrestrial AI in a Dark Forest universe; and (iii) the relevance of economics' Mythical Agent (homo economicus) for the design of value-aligned AI-systems. From the perspective of expected utility maximization, which both the fields of AI and economics share, these three topics are interrelated. By exploring these topics, several future avenues for economic research on AI becomes apparent, and areas where economic theory may benefit from a greater understanding of AI can be identified. Two further conclusions that emerge are first that a Singularity and existential risk from AI are still science fiction: which, however, should not preclude economics from bearing on the issues (it does not deter philosophers); and two, that economists should weigh in more on existential risk, and not leave this topic to lose credibility because of the Pascalian fanaticism of longtermism.
    Keywords: technology, artificial intelligence, economics, growth, existential risk, longtermism, Fermi Paradox, Grabby Aliens
    JEL: O40 O33 D01 D64
    Date: 2022–11
  11. By: Antonia Díaz (Instituto Complutense de Análisis Económico (ICAE), Universidad Complutense de Madrid (Spain).); Belén Jerez (Universidad Carlos III de Madrid (Spain).); Juan P. Rincón-Zapatero (Universidad Carlos III de Madrid (Spain).)
    Abstract: This paper shows that, when utility is imperfectly transferable and the search process is competitive (or directed), wealthier buyers pay higher prices to speed up transactions. This result is established in a dynamic model of the housing market where households save both to smooth consumption and to build a down payment. “Block recursivity” is ensured by the existence of risk-neutral housing intermediaries. The calibrated version of our benchmark economy features greater indebtedness and higher housing prices in the long run compared to a Walrasian model, especially when the elasticity of new housing supply is low. We also show that the long-run effect of greater credit availability on housing prices depends crucially on whether or not rental and real estate housing stocks are segmented. Under full segmentation, price effects are much larger, with and without search frictions. But, even if there is no segmentation, these effects are substantial in our search model when supply elasticity is low, being larger than in the Walrasian version of the model. The last result is reversed with full segmentation, when search frictions dampen the price effect of the credit expansion.
    Keywords: Competitive search; Wealth effects; Housing prices; Credit constraints; Housing supply elasticity; Rental market.
    JEL: D31 D83 E21 R21 R30
    Date: 2022
  12. By: David Albrecht; Thomas Meissner
    Abstract: We develop an experimentally validated, short and easy-to-use survey module for measuring individual debt aversion. To this end, we first estimate debt aversion on an individual level, using choice data from Meissner and Albrecht (2022). This data also contains responses to a large set of debt aversion survey items, consisting of existing items from the literature and novel items developed for this study. Out of these, we identify a survey module comprising two qualitative survey items to best predict debt aversion in the incentivized experiment.
    Date: 2022–11
  13. By: Ina Hajdini; Edward S. Knotek; John Leer; Mathieu Pedemonte; Robert W. Rich; Raphael Schoenle
    Abstract: Based on indirect utility theory, we introduce a novel methodology of measuring inflation expectations indirectly. This methodology starts at the individual level, asking consumers about the change in income required to buy the same amounts of goods and services one year ahead. Analytically, our methodology possesses smaller ex-post aggregate inflation forecast errors relative to forecasts based on conventional survey questions. We ask this question in a large-scale, high-frequency survey of consumers in the US and 14 countries, and we show that indirect consumer inflation expectations perform well along several empirical dimensions. Exploiting the geographically detailed, high-frequency variation in the data, we then show that individual experiences matter for inflation expectations, in a nuanced way. For example, age and gender have different effects internationally, while individual inflation and local experiences are generally highly relevant. In an application to gasoline price changes, we identify large effects of experienced gasoline price changes on inflation expectations, characterized by both overreaction and persistence.
    Keywords: Inflation; Expectations; Surveys; Consumers; Heterogeneous Beliefs
    JEL: E31 D84 E37 E71
    Date: 2022–11–22
  14. By: Ying Hu; Xiaomin Shi; Zuo Quan Xu
    Abstract: This paper studies finite-time optimal consumption-investment problems with power, logarithmic and exponential utilities, in a regime switching market with random coefficients, subject to coupled constraints on the consumption and investment strategies. We provide explicit optimal consumption-investment strategies and optimal values for the problems in terms of the solutions to some diagonally quadratic backward stochastic differential equation (BSDE) systems and linear BSDE systems with unbound coefficients. Some of these BSDEs are new in the literature and solving them is one of the main theoretical contributions of this paper. We accomplish the latter by applying the truncation, approximation technique to get some a priori uniformly lower and upper bounds for their solutions.
    Date: 2022–11
  15. By: Magdalena Brzozowicz (Faculty of Economic Sciences, University of Warsaw)
    Abstract: In this study, I examined the influence of the framing effect on the valuation of consumption goods in realistic shopping settings. In four field experiments comprising 1602 shopping center customers as participants, I elicited willingness to pay (WTP) for consumer products by manipulating framing conditions (positive vs. negative framing). Although my four experiments involved two different types of products (durable vs. fast-moving), two different types of framing (attribute vs. goal) and two different valuation procedures (hypothetical vs. consequential), their results were remarkably consistent. I observed that the framing effect had no impact on WTP for the presented products. In the light of both this study and the existing literature, I suspect that the framing effect is more likely to appear in solely hypothetical judgement and assessment tasks than in the context of eliciting consumer WTP
    Keywords: framing effect, field experiment, willingness to pay, WTP
    JEL: D91 C93 M31
    Date: 2021

This nep-upt issue is ©2022 by Alexander Harin. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.