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on Utility Models and Prospect Theory |
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Issue of 2023‒10‒23
eleven papers chosen by |
| By: | Liang Chen; Eugene Choo; Alfred Galichon; Simon Weber |
| Abstract: | We propose new results for the existence and uniqueness of a general nonparametric and nonseparable competitive equilibrium with substitutes. These results ensure the invertibility of a general competitive system. The existing literature has focused on the uniqueness of a competitive equilibrium assuming that existence holds. We introduce three properties that our supply system must satisfy: weak substitutes, pivotal substitutes, and responsiveness. These properties are sufficient to ensure the existence of an equilibrium, thus providing the existence counterpart to Berry, Gandhi, and Haile (2013)'s uniqueness results. For two important classes of models, bipartite matching models with full assignment and discrete choice models, we show that both models can be reformulated as a competitive system such that our existence and uniqueness results can be readily applied. We also provide an algorithm to compute the unique competitive equilibrium. Furthermore, we argue that our results are particularly useful for studying imperfectly transferable utility matching models with full assignment and non-additive random utility models. |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2309.11416&r=upt |
| By: | Bertrand Crettez (Université Paris-Panthéon-Assas, CRED - Centre de Recherche en Economie et Droit - Université Paris-Panthéon-Assas); Rabia Nessah (IESEG - UCL - Université catholique de Lille, LEM - Laboratoire d'Economie et de Management - UNS - Université Nice Sophia Antipolis (1965 - 2019) - CNRS - Centre National de la Recherche Scientifique - UCA - Université Côte d'Azur); Tarik Tazdaït (CNRS - Centre National de la Recherche Scientifique, CIRED - Centre International de Recherche sur l'Environnement et le Développement - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement - EHESS - École des hautes études en sciences sociales - AgroParisTech - ENPC - École des Ponts ParisTech - Université Paris-Saclay - CNRS - Centre National de la Recherche Scientifique, EHESS - École des hautes études en sciences sociales) |
| Abstract: | We propose a new notion of coalitional equilibria, the strong β-hybrid solution, which is a refinement of the hybrid solution introduced by Zhao. Zhao's solution is well suited to study situations where people cooperate within coalitions but where coalitions compete with one another. This paper's solution, as opposed to the hybrid solution, assigns to each coalition a strategy profile that is strongly Pareto optimal. Moreover, like the β-core, deviations by subcoalitions of any existing coalition are deterred by the threat of a unique counter-strategy available to the non-deviating players. Zhao proved the existence of existence of strong β-hybrid solution for transferable utility games with compact and convex strategy spaces and concave continuous payoff functions. Here, we extend his result to non-transferable utility games. |
| Keywords: | α-core β-core N -person game coalition structure hybrid solution strong hybrid solution, α-core, β-core, N -person game, coalition structure, hybrid solution, strong hybrid solution |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04204632&r=upt |
| By: | Arnaud Dupuy (Department of Economics and Business Economics, University of Luxembourg); John Kennes (Department of Economics and Business Economics, Aarhus University); Ran Sun Lyng (Tampere University) |
| Abstract: | We use a two-sided multidimensional matching model with imperfect transferable utility to estimate how CEOs/firms trade off preferred firm/CEO qualities against salary. These preferences are identifiable with data on CEO pecuniary compensation and assignment. We estimate the model with high-quality Danish data through maximum likelihood, accounting for CEO and firm fixed effects. The estimates reveal that CEOs have strong preferences for non-monetary job amenities that account for several puzzling features of the market for CEOs. The central role of CEO job preferences is also illustrated by several counterfactual experiments. |
| Keywords: | Job amenities, CEO compensation, Assignment Models, CEO-firm matching, Multidimensional matching |
| JEL: | G30 M12 G34 J32 C78 C35 |
| Date: | 2023–09–25 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2023-08&r=upt |
| By: | Linda Cai; Josh Gardner; S. Matthew Weinberg |
| Abstract: | Despite having the same basic prophet inequality setup and model of loss aversion, conclusions in our multi-dimensional model differs considerably from the one-dimensional model of Kleinberg et al. For example, Kleinberg et al. gives a tight closed-form on the competitive ratio that an online decision-maker can achieve as a function of $\lambda$, for any $\lambda \geq 0$. In our multi-dimensional model, there is a sharp phase transition: if $k$ denotes the number of dimensions, then when $\lambda \cdot (k-1) \geq 1$, no non-trivial competitive ratio is possible. On the other hand, when $\lambda \cdot (k-1) |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2309.14555&r=upt |
| By: | Nicolas Bonneton; Christopher Sandmann |
| Abstract: | This paper studies assortative matching in a non-stationary search-and-matching model with non-transferable payoffs. Non-stationarity entails that the number and characteristics of agents searching evolve endogenously over time. Assortative matching can fail in non-stationary environments under conditions for which Morgan (1994) and Smith (2006) show that it occurs in the steady state. This is due to the risk of worsening match prospects inherent to non-stationary environments. The main contribution of this paper is to derive the weakest sufficient conditions on payoffs for which matching is assortative. In addition to known steady state conditions, more desirable individuals must be less risk-averse in the sense of Arrow-Pratt. |
| Keywords: | non-stationary, assortative matching, random search, risk preferences, NTU |
| JEL: | C73 C78 D81 E32 |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2023_465&r=upt |
| By: | Shanyi Zhou; Ning Yan; Zhijun Li; Mo Geng; Xulong Zhang; Hongbiao Si; Lihua Tang; Wenyuan Sun; Longda Zhang; Yi Cao |
| Abstract: | Based on principal-agent theory and optimal contract theory, companies use the method of increasing executives' shareholding to stimulate collaborative innovation. However, from the aspect of agency costs between management and shareholders (i.e. the first type) and between major shareholders and minority shareholders (i.e. the second type), the interests of management, shareholders and creditors will be unbalanced with the change of the marginal utility of executive equity incentives.In order to establish the correlation between the proportion of shares held by executives and investments in corporate innovation, we have chosen a range of publicly listed companies within China's A-share market as the focus of our study. Employing a multi-variable linear regression model, we aim to analyze this relationship thoroughly.The following models were developed: (1) the impact model of executive shareholding on corporate innovation investment; (2) the impact model of executive shareholding on two types of agency costs; (3)The model is employed to examine the mediating influence of the two categories of agency costs. Following both correlation and regression analyses, the findings confirm a meaningful and positive correlation between executives' shareholding and the augmentation of corporate innovation investments. Additionally, the results indicate that executive shareholding contributes to the reduction of the first type of agency cost, thereby fostering corporate innovation investment. However, simultaneously, it leads to an escalation in the second type of agency cost, thus impeding corporate innovation investment. |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2309.10986&r=upt |
| By: | Oguzhan Celebi; Joel Flynn |
| Abstract: | How should authorities that care about match quality and diversity allocate resources when they are uncertain about the market? We introduce adaptive priority mechanisms (APM) that prioritize agents based on both their scores and characteristics. We derive an APM that is optimal and show that the ubiquitous priority and quota mechanisms are optimal if and only if the authority is risk-neutral or extremely risk-averse over diversity, respectively. With many authorities, each authority using the optimal APM is dominant and implements the unique stable matching. Using Chicago Public Schools data, we find that the gains from adopting APM may be considerable. |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2309.15997&r=upt |
| By: | Lotito Gianna (Department of Economics and Statistics "Cognetti de Martiis", University of Torino, Italy;); Maffioletti Anna (Department of Economics, Social Studies, Applied Mathematics and Statistics, University of Torino, Italy;); Santoni Michele (Department of Economics, Management and Quantitative Methods, University of Milano, Italy;) |
| Abstract: | This study investigated whether different sources of uncertainty exert different influences on both the ambiguity aversion/preference and ambiguity-generated insensitivity to likelihood changes. These two dimensions of ambiguity attitude were measured using matching probabilities for three-fold partitioned events, without needing information about subjective likelihoods. A total of 133 Italian university students were randomly assigned to three different treatment groups. Treatments differed depending on the decision context associated with natural sources of uncertainty (i.e., the Covid-19 pandemic, sovereign interest spread, and football matches) under different national scenarios (i.e., France and Italy). The experimental hypothesis was that each decision context could be characterised by both different degrees of emotional involvement and different knowledge/competence of the participants. Additionally, all the participants faced an artificial source of uncertainty, which was always represented by Ellsberg's three-colour problem. The study found that, within treatments, participants were generally more ambiguity-averse when facing the artificial source of uncertainty than natural sources of uncertainty. However, they were less sensitive to likelihood changes when assessing natural rather than artificial sources of uncertainty. Keeping the national dimension of the decision context constant, the between-treatment comparison showed stronger ambiguity insensitivity for Covid-19 versus Football treatment in France. Overall, these findings provide evidence in favour of source preference (thereby, ambiguity aversion/preference depends on the source of uncertainty) but strong evidence in favour of source sensitivity (thereby, likelihood insensitivity depends on the source of uncertainty). |
| Keywords: | Natural Sources of Ambiguity, Artificial Sources of Ambiguity, Source Preference, Source Sensitivity, Ellsberg Paradox. |
| JEL: | C91 D81 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:tur:wpapnw:083&r=upt |
| By: | Salvatore Greco; Diego Rago |
| Abstract: | Understanding how people actually trade off time for money is perhaps the major question in the field of time discounting. There is indeed a vast body of work devoted to explore the underlying mechanisms of the individual decision making process in an intertemporal context. This paper presents a family of new discount functions whereof we derive a formal axiomatization. Applying the framework proposed by Bleichrodt, Rohde and Wakker, we further extend their formulation of CADI and CRDI functions, making discounting a function not only of time delay but, simultaneously, also of time distortion. Our main purpose is, in practice, to provide a tractable setting within which individual intertemporal preferences can be outlined. Furthermore, we apply our models to study the relation between individual time preferences and personality traits. For the CADI-CADI, results show that the habit of smoking is heavily related with both impatience and time perception. Within the Big-Five framework, conscientiousness, agreeableness and openness are positively related with patience (low r, initial discount rate). |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2309.14009&r=upt |
| By: | Scott Condie (Department of Economics, Brigham Young University); Lars Stentoft (Department of Economics and Department of Actuarial and Statistical Sciences, Western University); Marie-Louise Vierø (Department of Economics and Business Economics, Aarhus University) |
| Abstract: | This paper considers the effect on asset prices of investors contemplating the possible occurrence of unexpected and unprecedented events that they have no basis to evaluate. We build a Capital Asset Pricing Model (CAPM) where, in addition to regular risk, investors are aware that they are potentially unaware of some events. We show that when investors feel that there exist states about which they are unaware, asset prices contain an unawareness premium. A driving force is that the “risk free†asset is no longer considered to be truly risk free. We develop a methodology that enables us to estimate the systematic portion of the unawareness premium, and we estimate it using data from 1980 to 2022. We find evidence in support of the hypothesis that unawareness, in addition to risk, is a determinant of expected equity returns. |
| Keywords: | CAPM, Equity Premium, Unawareness |
| JEL: | G41 D83 G12 |
| Date: | 2023–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2023-09&r=upt |
| By: | Alberto Quaini (Erasmus University Rotterdam); Fabio Trojani (University of Geneva; University of Turin; and Swiss Finance Institute); Ming Yuan (Columbia University) |
| Abstract: | Tradable factor risk premia are defined by the negative factor covariance with the Stochastic Discount Factor projection on returns. They are robust to misspecification or weak identification in asset pricing models, and they are zero for any factor weakly correlated with returns. We propose a simple estimator of tradable factor risk premia that enjoys the Oracle Property, i.e., it performs as well as if the weak or useless factors were known. This estimator not only consistently removes such factors, but it also gives rise to reliable tests of asset pricing models. We study empirically a family of asset pricing models from the factor zoo and detect a robust subset of economically relevant and well-identified models, which are built out of factors with a nonzero tradable risk premium. Well-identified models feature a relatively low factor space dimension and some degree of misspecification, which harms the interpretation of other established notions of a factor risk premium in the literature. |
| Keywords: | Testing of asset pricing models, factor risk premia, useless and weak factors, factor selection, model misspecification, Oracle estimation and inference |
| JEL: | G12 C12 C13 C51 C52 C58 |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2381&r=upt |