nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2023‒03‒06
fifteen papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Subjective Expected Utility Through Stochastic Independence By Michel Grabisch; Benjamin Monet; Vassili Vergopoulos
  2. Mixture Attitudes of Expectation-Based Loss Aversion By Daijiro Kawanaka
  3. Sensitivity Analysis among Commodities and Prices: A Utility Maximization Perception By Mohajan, Devajit; Mohajan, Haradhan
  4. Matching Function Equilibria with Partial Assignment: Existence, Uniqueness and Estimation By Liang Chen; Eugene Choo; Alfred Galichon; Simon Weber
  5. Stable and Extremely Unequal By Alfred Galichon; Octavia Ghelfi; Marc Henry
  6. Estimating Very Large Demand Systems By Lanier, Joshua; Large, Jeremy; Quah, John
  7. Estimating Separable Matching Models By Alfred Galichon; Bernard Salanié
  8. A Nonparametric Stochastic Set Model: Identification, Optimization, and Prediction By Yi-Chun Chen; Dmitry Mitrofanov
  9. Wealth distribution and household economies of scale: Do families matter for inequality? By Rapp, Severin
  10. The Investment Management Game: Extending the Scope of the Notion of Core By Vijay V. Vazirani
  11. A mechanism of proportional contributions for public good games By Rafat Beigpoor Shahrivar; Duesterhoeft, Ilka; Rogna, Marco; Vogt, Carla
  12. Risk averse policies foster bio-economic sustainability in mixed fisheries By Eric Tromeur; Luc Doyen; Violaine Tarizzo; L. Richard Little; Sarah Jennings; Olivier Thébaud
  13. A Note on Salience of Own Preferences and the Consensus Effect By Thomas Dohmen; Simone Quercia; Jana Willrodt
  14. Economics and Measurement: New measures to model decision making By Ingvild Almås; Orazio Attanasio; Pamela Jervis
  15. Gender Gap, Intra Household Bargaining and Sex Selective Abortion in Albania By Keiti Kondi

  1. By: Michel Grabisch (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Benjamin Monet; Vassili Vergopoulos
    Abstract: This paper studies decision-making in the face of two stochastically independent sources of uncertainty. It characterizes axiomatically a Subjective Expected Utility representation of preferences where subjective beliefs consist of a product probability measure. The two key axioms in this characterization both involve some behavioral notions of stochastic independence. Our result can be understood as a purely subjective version of the Anscombe and Aumann (1963) theorem that avoids the controversial use of exogenous probabilities by appealing to stochastic independence. We also obtain an extension to Choquet Expected Utility representations.
    Keywords: subjective probability, expected utility, stochastic independence, subjective independence, capacity, Choquet expectation.
    Date: 2023
  2. By: Daijiro Kawanaka (Graduate school of Osaka University)
    Abstract: Köszegi and Rabin (2006, 2007) formulate loss-aversion models called Preferred Personal Equilibrium (PPE) and Choice-acclimating Personal Equilibrium (CPE) so successfully that many papers have been applied their models to a variety of economic fields in this decade. In this paper, without assuming any specific functional form, I show that these two loss-aversion models satisfy strong mixture aversion in the sense that a non-degenerate lottery is strictly preferred to any mixture between the lottery and its certainty equivalent. This property distinguishes these loss-aversion models from many other standard models such as the expected utility theory and disappointment aversion so that this result allows experimental economists to test a class of these models in a simple setting.
    Keywords: Prospect theory, Loss aversion, Reference point, Mixture aversion, Betweenness
    JEL: D11 D81 D91
    Date: 2023–02
  3. By: Mohajan, Devajit; Mohajan, Haradhan
    Abstract: Utility maximization policy is essential for the sustainability of the firms and organizations. In this article, two Lagrangian multipliers are used to perform the research successfully. Moreover, the paper takes attempts to run with four commodities and two constraints, such as budget constraint, and coupon constraint. In the study, both Hessian and Jacobian are used to show the mathematical calculations precisely and concisely. The sensitivity analysis among two commodities and one price unit of commodity are included in this paper for forecasting on the economic model during the utility maximization procedure.
    Keywords: Lagrange multipliers, sensitivity analysis, utility maximization
    JEL: A11 A13 C3 C51 C61 C67
    Date: 2022–12–10
  4. By: Liang Chen (Wuhan University [China]); Eugene Choo (Yale-NUS College); Alfred Galichon (NYU - NYU System, CIMS - Courant Institute of Mathematical Sciences [New York] - NYU - New York University [New York] - NYU - NYU System, ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique); Simon Weber (University of York [York, UK])
    Abstract: In this paper, we argue that models coming from a variety of fields share a common structure that we call matching function equilibria with partial assignment. This structure revolves around an aggregate matching function and a system of nonlinear equations. This encompasses search and matching models, matching models with transferable, non-transferable and imperfectly transferable utility, and matching with peer effects. We provide a proof of existence and uniqueness of an equilibrium as well as an efficient algorithm to compute it. We show how to estimate parametric versions of these models by maximum likelihood. We also propose an approach to construct counterfactuals without estimating the matching functions for a subclass of models. We illustrate our estimation approach by analyzing the impact of the elimination of the Social Security Student Benefit Program in 1982 on the marriage market in the United States.
    Keywords: Matching function, Maximum likelihood estimation, Counterfactuals, Matching, Transferable utility, Imperfectly transferable utility
    Date: 2021–02–04
  5. By: Alfred Galichon (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, NYU - NYU System); Octavia Ghelfi (NYU - NYU System); Marc Henry (Penn State - Pennsylvania State University - Penn State System)
    Abstract: We highlight the tension between stability and equality in non transferable utility matching. We consider many to one matchings and refer to the two sides of the market as students and schools. The latter have aligned preferences, which in this context means that a school's utility is the sum of its students' utilities. We show that the unique stable allocation displays extreme inequality between matched pairs.
    Date: 2021–08–17
  6. By: Lanier, Joshua; Large, Jeremy; Quah, John
    Abstract: We present a discrete choice, random utility model and a new estimation technique for analyzing consumer demand for large numbers of products. We allow the consumer to purchase multiple units of any product and to purchase multiple products at once (think of a consumer selecting a bundle of goods in a supermarket). In our model each product has an associated unobservable vector of attributes from which the consumer derives utility. Our model allows for heterogeneous utility functions across consumers, complex patterns of substitution and complementarity across products, and nonlinear price effects. The dimension of the attribute space is, by assumption, much smaller than the number of products, which effectively reduces the size of the consumption space and simplifies estimation. Nonetheless, because the number of bundles available is massive, a new estimation technique, which is based on the practice of negative sampling in machine learning, is needed to sidestep an intractable likelihood function. We prove consistency of our estimator, validate the consistency result through simulation exercises, and estimate our model using supermarket scanner data.
    Keywords: discrete choice, demand estimation, negative sampling, machine learning, scanner data
    JEL: C13 C34 D12 L20 L66
    Date: 2022–06
  7. By: Alfred Galichon (NYU - New York University [New York] - NYU - NYU System, ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique); Bernard Salanié (Columbia University [New York])
    Abstract: In this paper we propose two simple methods to estimate models of matching with transferable and separable utility introduced in Galichon and Salanié (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.
    Keywords: Matching, Marriage, Assignment, Estimations comparison
    Date: 2022–04–04
  8. By: Yi-Chun Chen; Dmitry Mitrofanov
    Abstract: The identification of choice models is crucial for understanding consumer behavior and informing marketing or operational strategies, policy design, and product development. The identification of parametric choice-based demand models is typically straightforward. However, nonparametric models, which are highly effective and flexible in explaining customer choice, may encounter the challenge of the dimensionality curse, hindering their identification. A prominent example of a nonparametric model is the ranking-based model, which mirrors the random utility maximization (RUM) class and is known to be nonidentifiable from the collection of choice probabilities alone. Our objective in this paper is to develop a new class of nonparametric models that is not subject to the problem of nonidentifiability. Our model assumes bounded rationality of consumers, which results in symmetric demand cannibalization and intriguingly enables full identification. Additionally, our choice model demonstrates competitive prediction accuracy compared to the state-of-the-art benchmarks in a real-world case study, despite incorporating the assumption of bounded rationality which could, in theory, limit the representation power of our model. In addition, we tackle the important problem of finding the optimal assortment under the proposed choice model. We demonstrate the NP-hardness of this problem and provide a fully polynomial-time approximation scheme through dynamic programming. Additionally, we propose an efficient estimation framework using a combination of column generation and expectation-maximization algorithms, which proves to be more tractable than the estimation algorithm of the aforementioned ranking-based model.
    Date: 2023–02
  9. By: Rapp, Severin
    Abstract: Wealth inequality assumes a central role in the debate on economic inequality. Yet, in contrast to the literature on income distribution, the role of the household in moderating inequality remains poorly understood. This paper argues that economies of scale to household wealth matter crucially, offering both a methodology and empirical results to account for household scale effects. As wealth enters individual utility directly (not at least due to bequest motives), it is possible to test for economies of scale in components of household wealth held for such non-consumption purposes, which may differ from traditional consumption scale effects. Using the model of a capitalist-spirit bequest motive to formalise the decision of allocating wealth between consumption and non- consumption purposes, this paper is the first to offer a concept of economies of scale for wealth rather than an ad-hoc approach. Adapting the model to accommodate household size effects, the second contribution of this paper is to estimate wealth economies of scale using satisfaction data from the German Socio-Economic Panel (SOEP), drawing on a non-linear estimator to recover structural model parameters. Next, the article appraises the implications of scale effects adjustments for the distribution of household wealth in Germany. Overall, the findings suggest that non-consumption economies of scale are almost perfect. Since non-consumption wealth matters primarily among the affluent households, adjusting household wealth for size does not affect them strongly, feeding into higher estimates of inequality. For example, the Palma ratio for Germany in 2012 increases by 17.1% once scale effects are taken into account, and the Gini index by 3%. The results do not only inform the academic literature on scale effects, and thus the measurement of inequality and living conditions, but also provides a new perspective on the influence of bequest (motives) on wealth inequality.
    Keywords: inequality, wealth, economies of scale, measurement, capitalist spirit
    Date: 2023–02
  10. By: Vijay V. Vazirani
    Abstract: The core is a dominant solution concept in economics and game theory. In this context, the following question arises, ``How versatile is this solution concept?'' We note that within game theory, this notion has been used for profit -- equivalently, cost or utility -- sharing only. In this paper, we show a completely different use for it: in an {\em investment management game}, under which an agent needs to allocate her money among investment firms in such a way that {\em in each of exponentially many future scenarios}, sufficient money is available in the ``right'' firms so she can buy an ``optimal investment'' for that scenario. We study a restriction of this game to {\em perfect graphs} and characterize its core. Our characterization is analogous to Shapley and Shubik's characterization of the core of the assignment game. The difference is the following: whereas their characterization follows from {\em total unimodularity}, ours follows from {\em total dual integrality}. The latter is another novelty of our work.
    Date: 2023–02
  11. By: Rafat Beigpoor Shahrivar; Duesterhoeft, Ilka; Rogna, Marco; Vogt, Carla
    Abstract: Public good games in coalitional form, such as the ones depicting international environmental agreements for the reduction of a global pollutant, generally foresee scarce levels of cooperation. The incentive to free ride, that increases for higher levels of cooperation, prevents the formation of stable coalitions. The introduction of other-regarding preferences, in the form of Fehr and Schmidt utility functions, enlarges cooperation, but still at suboptimal levels. The present paper considers a further possibility, namely the introduction of a mechanism through which the contributions of players to the public good are proportional to the average contribution of the other players abiding to the mechanism: proportional contributions. The mechanism is therefore rooted into reciprocity. By applying it to a standard abatement game parameterized on the RICE model, we show that the mechanism is in fact able to increase cooperation both under standard and under F&S preferences. Stability of the grand coalition is never reached, but potential internally stable grand coalitions are achieved under F&S preferences. The attainment of higher cooperation comes at the expense of the level of global abatement that is lower when proportional contributions are in place.
    Keywords: Coalitional game, cooperation, F&S preferences, public good, reciprocity
    JEL: C72 D63 H41 Q54
    Date: 2023
  12. By: Eric Tromeur; Luc Doyen (CEE-M - Centre d'Economie de l'Environnement - 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 - UM - Université de Montpellier); Violaine Tarizzo; L. Richard Little (CSIRO Ocean & Atmosphere, CSIRO); Sarah Jennings (UTAS - University of Tasmania [Hobart, Australia]); Olivier Thébaud (IFREMER - Institut Français de Recherche pour l'Exploitation de la Mer)
    Date: 2021–12
  13. By: Thomas Dohmen (University of Bonn, IZA Institute of Labor Economics, Maastricht University); Simone Quercia (University of Verona); Jana Willrodt (Düsseldorf Institute for Competition Economics (DICE))
    Abstract: In this paper, we hypothesize that the strength of the consensus effect, i.e., the tendency for people to overweight the prevalence of their own values and preferences when forming beliefs about others’ values and preferences, depends on the salience of own preferences. We manipulate salience by varying the order of elicitation of preferences and beliefs. Although our results confirmthe existence of the consensus effect, we find no evidence of a difference between the two orders of elicitation. While our results highlight the robustness of the consensus effect, they also indicate that salience does not mediate the strength of this phenomenon.
    Keywords: Consensus effect, social preferences, trust game, beliefs
    JEL: C91 D01 D83 D91
    Date: 2023–02
  14. By: Ingvild Almås; Orazio Attanasio; Pamela Jervis
    Abstract: Most empirical work in economics has considered only a narrow set of measures as meaningful and useful to characterize individual behavior, a restriction justified by the difficulties in collecting a wider set. However, this approach often forces the use of strong assumptions to estimate the parameters that inform individual behavior and identify causal links. In this paper, we argue that a more flexible and broader approach to measurement could be extremely useful and allow the estimation of richer and more realistic models that rest on weaker identifying assumptions. We argue that the design of measurement tools should interact with, and depend on, the models economists use. Measurement is not a substitute for rigorous theory, it is an important complement to it, and should be developed in parallel to it. We illustrate these arguments with a model of parental behavior estimated on pilot data that combines conventional measures with novel ones.
    JEL: A1 D1
    Date: 2023–01
  15. By: Keiti Kondi (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: Among European countries, Albania has by far the highest sex ratio at birth with 1.12 boys per girl, compared to the European average of 1.058. Considering this disbalance, this study analyzes the relative importance of three underlying mechanisms: sex bias in parents’ preferences for children, the gender gap in intra-household bargaining, and cultural norms. We develop a parsimonious model which incorporates different utilities for boys and girls, the bargaining between family members, and the decision about abortion dependent on its cost and including social stigma. We calibrate the model using data from the Demographic and Health Survey dataset on Albania for the year 2008 by measuring the preference for children of both sexes by the time invested in the child, education, violence, and women empowerment by how independent are women in taking their own decisions. We find that if we increase gender empowerment and equalize preference in children, the sex ratio decreases by 0.04 but it remains above its biological value. This residual could be interpreted as cultural norms affecting the decision-making and not allowing the above indicators in bringing sex ratios down to their biological values. To conclude we discuss different policies that can help in the decline of the sex ratio disparity while accounting for norms.
    Keywords: sex selective abortion, gender equality, investment in children, fertility, household bargaining power
    JEL: O1
    Date: 2023–01–13

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