|
on Utility Models and Prospect Theory |
|
Issue of 2023‒11‒20
twenty papers chosen by |
| By: | Christopher P. Chambers; Yusufcan Masatlioglu; Collin Raymond |
| Abstract: | Many models of economics assume that individuals distort objective probabilities. We propose a simple consistency condition on distortion functions, which we term distortion coherence, that ensures that the function commutes with conditioning on an event. We show that distortion coherence restricts belief distortions to have a particular function form: power-weighted distortions, where distorted beliefs are proportional to the original beliefs raised to a power and weighted by a state-specific value. We generalize our findings to allow for distortions of the probabilities assigned to both states and signals, which nests the functional forms widely used in studying probabilistic biases (e.g., Grether, 1980 and Benjamin, 2019). We show how coherent distorted beliefs are tightly related to several extant models of motivated beliefs: they are the outcome of maximizing anticipated expected utility subject to a generalized Kullback-Liebler cost of distortion. Moreover, in the domain of lottery choice, we link coherent distortions to explanations of non-expected utility like the Allais paradox: individuals who maximize subjective expected utility maximizers conditional on coherent distorted beliefs are equivalent to the weighted utility maximizers studied by Chew [1983]. |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2310.09879&r=upt |
| By: | Sylvie Démurger; Siwar Khelifa; Béatrice Rey |
| Abstract: | This paper investigates how rural-urban income differentials interact with the risk coping motive to shape households' migration behavior. Using a model of migration behavior under agricultural income risk, our theoretical results suggest that while income differentials remain crucial in determining the migration decision, they are additionally determined by the agricultural income risk the household is facing. Empirical findings on Chinese farm households indicate that the incidence of migration as a risk coping mechanism is lower for households with a negative expected urban-to-rural income difference. Moreover, we find that, when these households care about the human capital of their children, their marginal utility of income increases as the educational performance of their children deteriorates, implying that, when migration is used as a risk coping strategy, households with lower educational performance of children may be more likely to send a parent for migration. This result also suggests that the best specification of the utility function to consider for these households is the non-separability between the household's earnings and their children's human capital. |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:irn:wpaper:23-03&r=upt |
| By: | Aronsson, Thomas (Umeå University, Umeå School of Business); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, Göteborg University) |
| Abstract: | The present paper analyzes optimal redistributive income taxation in a Mirrleesian framework extended with other-regarding preferences at the individual level. We start by developing a general model where the other-regarding preference component of the utility functions is formulated to encompass almost any form of preferences for other people’s disposable income, and then continue with four prominent special cases. Two of these reflect self-centered inequality aversion, based on Fehr and Schmidt (1999) and Bolton and Ockenfels (2000), whereas the other two reflect non-self-centered inequality aversion, where people have preferences for a low Gini coefficient and a high minimum income level in society, respectively. We find that other-regarding preferences may substantially increase the marginal tax rates, including the top rates, and that different types of other-regarding preferences have very different implications for optimal taxation. |
| Keywords: | Optimal Taxation; Redistribution; Social Preferences; Inequality Aversion |
| JEL: | D62 D90 H21 H23 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0837&r=upt |
| By: | Daniel Agness (UC Berkeley); Travis Baseler (University of Rochester); Sylvain Chassang (Princeton University); Pascaline Dupas (Stanford University); Erik Snowberg (UBC and University of Utah) |
| Abstract: | People’s value for their own time is a key input in evaluating public policies: evaluations should account for time taken away from work or leisure as a result of policy. Using rich choice data collected from farming households in western Kenya, we show that households exhibit non-transitive preferences consistent with behavioral features such as loss aversion and self-serving bias. As a result, neither market wages nor standard valuation techniques (such as the Becker-DeGroot-Marschak—BDM—mechanism of Becker et al., 1964) correctly measure participants’ value of time. Using a structural model, we identify the mix of behavioral features driving our choice data. We find that these features distort choices when exchanging cash either for time or for goods. Our model estimates suggest that valuing the time of the self-employed at 60% of the market wage is a reasonable rule of thumb. |
| Keywords: | value of time, non-transitivity, labor rationing, loss aversion, self-serving bias |
| JEL: | C93 D61 D91 J22 O12 Q12 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:pri:cepsud:310&r=upt |
| By: | Nicolo Cesa-Bianchi; Roberto Colomboni; Maximilian Kasy |
| Abstract: | We consider the problem of repeatedly choosing policies to maximize social welfare. Welfare is a weighted sum of private utility and public revenue. Earlier outcomes inform later policies. Utility is not observed, but indirectly inferred. Response functions are learned through experimentation. We derive a lower bound on regret, and a matching adversarial upper bound for a variant of the Exp3 algorithm. Cumulative regret grows at a rate of $T^{2/3}$. This implies that (i) welfare maximization is harder than the multi-armed bandit problem (with a rate of $T^{1/2}$ for finite policy sets), and (ii) our algorithm achieves the optimal rate. For the stochastic setting, if social welfare is concave, we can achieve a rate of $T^{1/2}$ (for continuous policy sets), using a dyadic search algorithm. We analyze an extension to nonlinear income taxation, and sketch an extension to commodity taxation. We compare our setting to monopoly pricing (which is easier), and price setting for bilateral trade (which is harder). |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2310.09597&r=upt |
| By: | Grace C. Liu (Research to Empower, USA); Willem Spanjers (Kingston University, UK; ICEA; Rimini Centre for Economic Analysis) |
| Abstract: | This paper addresses the unexplained phenomenon of gender differences in entrepreneurial decision-making, particularly in business sectors involving innovation and risk. Although the topics of risk attitudes and uncertainty have been studied comprehensively from a gender perspective, research that combines different forms of uncertainty and links them with women’s entrepreneurial decision-making has not been done to the best of our knowledge. This paper provides a theoretical framework involving models on risk, ambiguity, perceptions of risk as in cumulative prospect theory, and asymmetric information. It unifies and connects these models through specific assumptions on utility functions in the presence of uncertainty and uses bias discount factors to denote how strongly biases devalue outcomes. Conclusions from the models indicate that a range of external factors—such as race and access to education and social networks—may interact with the internal behavioral biases of an entrepreneur, such as overconfidence, risk appetite, altruism, and trust in others. By detailing and analyzing theoretical gender-type differences and their effects on entrepreneurial decision-making, we find that traditional one-dimensional gender policies are not sufficient to address complex gender issues. Rather, we suggest a more multi-dimensional and holistic policy approach that combines traditional gender policies and policies for long-term sustainability, encouraging firms to be more socially and environmentally conscious, and demanding less “greedy works” as Nobel laureate Professor Goldin also argued. It aims to create a new business eco-system that is more feminine-friendly and balanced, considering gender-type differences and incentive biases to address the current worldwide gender disparities in entrepreneurship. |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:23-15&r=upt |
| By: | Jérôme Garnier-Brun; J.-P. Bouchaud; Michael Benzaquen (LadHyX - Laboratoire d'hydrodynamique - X - École polytechnique - CNRS - Centre National de la Recherche Scientifique) |
| 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: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03797176&r=upt |
| By: | Dirk Bergemann; Tan Gan; Yingkai Li |
| Abstract: | We study a sender-receiver model where the receiver can commit to a decision rule before the sender determines the information policy. The decision rule can depend on the signal structure and the signal realization that the sender adopts. This framework captures applications where a decision-maker (the receiver) solicit advice from an interested party (sender). In these applications, the receiver faces uncertainty regarding the sender's preferences and the set of feasible signal structures. Consequently, we adopt a unified robust analysis framework that includes max-min utility, min-max regret, and min-max approximation ratio as special cases. We show that it is optimal for the receiver to sacrifice ex-post optimality to perfectly align the sender's incentive. The optimal decision rule is a quota rule, i.e., the decision rule maximizes the receiver's ex-ante payoff subject to the constraint that the marginal distribution over actions adheres to a consistent quota, regardless of the sender's chosen signal structure. |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2310.10024&r=upt |
| By: | George Loewenstein; Zachary Wojtowicz |
| Abstract: | Attention is a pivotal resource in the modern economy and plays an increasingly prominent role in economic analysis. We summarize research on attention from both psychology and economics, placing a particular emphasis on its capacity to explain numerous documented violations of classical economic theory. We also propose promising new directions for future research, including attention-based utility, the recent proliferation of attentional externalities introduced by digital technology, the potential for artificial intelligence to compete with human attention, and the significant role that boredom, curiosity, and other motivational states play in determining how people allocate attention. |
| Keywords: | attention, motivation, behavioural bias, information, learning, education, artificial intelligence, machine learning, future of work |
| JEL: | D83 D90 D91 I00 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10712&r=upt |
| By: | Marc Fleurbaey (Paris School of Economics, CNRS & ENS Paris); Stéphane Zuber (Université Paris 1 Panthéon-Sorbonne, CNRS, & Paris School of Economics, Centre d'Economie de la Sorbonne) |
| Abstract: | Suppose that, for whatever reason, it is decided that inequalities within countries are more offensive than inequalities between countries, and that inequalities between populations living together are more offensive than inequalities between generations living in different times. Can a social welfare function express that preference? We show that it is actually difficult to in corporate such a localist preference into a social welfare function, except in a limited way (i.e., from a situation of specific similarity between countries). We also show that in order to obtain such preferences, the relative size of inequality aversion within and between countries may be counter-intuitive in some relevant cases, in the sense that a greater inequality aversion may happen to be required across countries than within countries. This research highlights new social welfare functions that aggregate the outcomes of evaluations over pairs of agents |
| Keywords: | inequality aversion; transfer principle; within-country preference |
| JEL: | D04 D63 D64 D78 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:23014&r=upt |
| By: | Michael Boutros; Nuno Clara; Francisco Gomes |
| Abstract: | In the United States, student debt currently represents the second largest component of consumer debt, just after mortgage loans. Repayment of those loans reduces disposable income early in their life cycle when marginal utility is particularly high, and limits households' ability to build a buffer stock of wealth to insure against background risks. In this paper we study alternative student debt contracts, which offer a 10-year deferral period. Individuals either defer principal payments only ("Principal Payment Deferral", PPD) or all payments ("Full Payment Deferral", FPD) with the missed interest payments added to the value of the debt outstanding. We first calibrate an equilibrium with the current contracts, and then solve for counterfactual equilibria with the PPD or FPD contracts. We find that both alternatives generate economically large welfare gains, which are robust to different assumptions about the behavior of the lenders and borrower preferences. We decompose the gains into the percentages resulting from loan repricing and from the deferral of debt repayments. We compare these alternative contracts with the current changes in income driven repayment plans being proposed by the current U.S. administration and show that they dominate such proposals. Crucially, the PPD and FPD contracts deliver similar welfare gains to the debt relief program considered by the administration, with no impact on the government budget constraint. |
| Keywords: | Asset pricing; Economic models; Financial markets; Labour markets; Market structure and pricing |
| JEL: | E2 G5 H3 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:23-54&r=upt |
| By: | Axel Anderson (Department of Economics, Georgetown University); Nikoloz Pkhakadze (ISET-Tbilisi State University) |
| Abstract: | This paper considers Bayesian persuasion between a sender and two receivers. The sender's payoff is a function of the receivers' beliefs on the binary payoff relevant state. All agents share a common prior about this state. But, we assume disagreement about a payoff irrelevant state, a binary variable that enters no utility functions. If the sender's payoff is differentiable and strictly monotone, then the sender never fully conceals. A convex payoff is insufficient for full revelation, but guarantees that every signal rules out two of the four states. We measure polarization by the sender's expectation of the absolute difference between the receivers posterior beliefs on the payoff relevant state, and solve for the maximum polarization across all message services. With linear payoff functions, the sender chooses a message service that achieves a significant fraction of this maximum. The sender's payoff is strictly increasing in the prior disagreement between the receivers. Given extreme prior disagreement between the receivers, we explicitly solve for the optimal message service when the sender has monotone payoffs in two general cases: bi-concave and bi-convex preferences. In both cases, the optimal message services induce polarization equal to the common prior on the sender's least preferred payoff relevant state. |
| Keywords: | Polarization, Endogenous Polarization, Communication Games, Bayesian Persuasion |
| JEL: | C72 |
| Date: | 2023–07–17 |
| URL: | http://d.repec.org/n?u=RePEc:geo:guwopa:gueconwpa~23-23-04&r=upt |
| By: | Rosenblatt, Lucas; Herman, Bernease; Holovenko, Anastasia; Lee, Wonkwon; Loftus, Joshua; McKinnie, Elizabeth; Rumezhak, Taras; Stadnik, Andrii; Howe, Bill; Stoyanovich, Julia |
| Abstract: | Differential privacy (DP) data synthesizers are increasingly proposed to afford public release of sensitive information, offering theoretical guarantees for privacy (and, in some cases, utility), but limited empirical evidence of utility in practical settings. Utility is typically measured as the error on representative proxy tasks, such as descriptive statistics, multivariate correlations, the accuracy of trained classifiers, or performance over a query workload. The ability for these results to generalize to practitioners' experience has been questioned in a number of settings, including the U.S. Census. In this paper, we propose an evaluation methodology for synthetic data that avoids assumptions about the representativeness of proxy tasks, instead measuring the likelihood that published conclusions would change had the authors used synthetic data, a condition we call epistemic parity. Our methodology consists of reproducing empirical conclusions of peer-reviewed papers on real, publicly available data, then re-running these experiments a second time on DP synthetic data and comparing the results. We instantiate our methodology over a benchmark of recent peer-reviewed papers that analyze public datasets in the ICPSR social science repository. We model quantitative claims computationally to automate the experimental workflow, and model qualitative claims by reproducing visualizations and comparing the results manually. We then generate DP synthetic datasets using multiple state-of-the-art mechanisms, and estimate the likelihood that these conclusions will hold. We find that, for reasonable privacy regimes, state-of-the-art DP synthesizers are able to achieve high epistemic parity for several papers in our benchmark. However, some papers, and particularly some specific findings, are difficult to reproduce for any of the synthesizers. Given these results, we advocate for a new class of mechanisms that can reorder the priorities for DP data synthesis: favor stronger guarantees for utility (as measured by epistemic parity) and offer privacy protection with a focus on application-specific threat models and risk-assessment. |
| Keywords: | NSF Awards Nos. 1916505; 1922658; 1934405; NSF Graduate Research Fellowship Grant No. DGE-2039655 |
| JEL: | C1 |
| Date: | 2023–08–24 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:120493&r=upt |
| By: | Marius Schwartz (Department of Economics, Georgetown University); Yongmin Chen (Department of Economics, University of Colorado Boulder) |
| Abstract: | We analyze alternative ways to assign the default position for competing digital goods such as search engines. When two firms vie for the position through bidding, the higher-quality firm typically wins but delivers lower utility than the rival due to heightened monetization (e.g., unwanted ads), exploiting consumers' switching costs. Paradoxically, increasing via regulation the rival's default share tends to raise profit and harm consumers, at least in the short run. Delegating the default choice to consumers benefits them but harms the weaker firm. Our findings highlight the subtle welfare tradeoffs in default assignment, an important and controversial policy issue. |
| Keywords: | Default Position, Digital Goods, Competition, Regulation |
| JEL: | L1 L4 |
| Date: | 2023–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:geo:guwopa:gueconwpa~23-23-05&r=upt |
| By: | Andrews, Brendon P. (University of Alberta, Department of Economics) |
| Abstract: | Healthcare technologies are often appraised under considerable ambiguity over the size of incremental benefits and costs, and thus how decision-makers combine unclear information to make recommendations is of considerable public interest. This paper provides a conceptual foundation for such decision-making under ambiguity, formalizing and differentiating the decision problems of a representative policy-maker reviewing the results from an economic evaluation. A primary result is that presenting information to regulators in an incremental cost-effectiveness ratio or cost-effectiveness analysis (CEA) format instead of a net monetary benefit or cost-benefit analysis (CBA) framework may induce errors in decision-making when there exists ambiguity in incremental benefits and decision-makers use well-known decision rules to combine information. Ambiguity in incremental costs or the value of the cost-effectiveness threshold do not distort decision-making in my framework. In specific settings, I show that the CEA framing may result in the approval of fewer technologies relative to CBA framing. I interpret these results as predictions on how the presentation of information from economic evaluations to regulators may frame and distort recommendations. All the results extend to non-healthcare contexts. |
| Keywords: | ambiguity; structural uncertainty; economic evaluation; cost-effectiveness; cost-benefit analysis; healthcare technology assessment; regulation |
| JEL: | D70 D81 H40 I18 O38 |
| Date: | 2023–10–30 |
| URL: | http://d.repec.org/n?u=RePEc:ris:albaec:2023_009&r=upt |
| By: | Christos Genakos; Costas Roumanias; Tommaso Valletti |
| Abstract: | We present novel evidence from a large panel of UK consumers who receive personalized reminders from a specialist price-comparison website about the precise amount they could save by switching to their best-suited alternative mobile telephony plan. We document three phenomena. First, even self-registered consumers with positive savings exhibit inertia. Second, we show that being informed about potential savings has a positive and significant effect on switching. Third, controlling for savings, the effect of incurring overage payments is significant and similar in magnitude to the effect of savings: paying an amount that exceeds the recurrent monthly fee weighs more on the switching decision than being informed that one can save that same amount by switching to a less inclusive plan. We interpret this asymmetric reaction on switching behavior as potential evidence of loss aversion. In other words, when facing complex and recurrent tariff plan choices, consumers care about savings but also seem to be willing to pay upfront fees in order to get "peace of mind". |
| Keywords: | tariff/plan choice, inertia, switching, loss aversion, mobile telephony |
| Date: | 2023–07–25 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1939&r=upt |
| By: | Rahul Ladhania; Jann Spiess; Lyle Ungar; Wenbo Wu |
| Abstract: | We consider learning personalized assignments to one of many treatment arms from a randomized controlled trial. Standard methods that estimate heterogeneous treatment effects separately for each arm may perform poorly in this case due to excess variance. We instead propose methods that pool information across treatment arms: First, we consider a regularized forest-based assignment algorithm based on greedy recursive partitioning that shrinks effect estimates across arms. Second, we augment our algorithm by a clustering scheme that combines treatment arms with consistently similar outcomes. In a simulation study, we compare the performance of these approaches to predicting arm-wise outcomes separately, and document gains of directly optimizing the treatment assignment with regularization and clustering. In a theoretical model, we illustrate how a high number of treatment arms makes finding the best arm hard, while we can achieve sizable utility gains from personalization by regularized optimization. |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2311.00577&r=upt |
| By: | Ernst Fehr (Department of Economics, Zurich University. Blümlisalpstrasse 10, 8006 Zurich, Switzerland); Thomas Epper (IESEG School of Management, Univ. Lille, CNRS, UMR 9221- LEM - Lille Economie Management F-59000 Lille, France); Julien Senn (Department of Economics, Zurich University. Blûmlisalpstrasse 10, 8006 Zurich, Switzerland) |
| Abstract: | Increasing inequality and associated egalitarian sentiments have put redistribution on the political agenda. In this paper, we take advantage of Swiss direct democracy, where people voted several times on strongly redistributive policies in national plebiscites, to study the link between social preferences and a behaviorally validated measure of support for redistribution in a broad sample of the Swiss population. Using a novel nonparametric Bayesian clustering algorithm, we uncover the existence of three fundamentally distinct preference types in the population: predominantly selfish, inequality averse and altruistic individuals. We show that inequality averse and altruistic individuals display a much stronger support for redistribution, particularly if they are more affluent. In addition, we show that previously identified key motives underlying opposition to redistribution – such as the belief that effort is an important driver of individual success – play no role for selfish individuals but are highly relevant for other-regarding individuals. Finally, while inequality averse individuals display strong support for policies that primarily aim to reduce the incomes of the rich, altruistic individuals are considerably less supportive of these policies. Thus, knowledge about the qualitative properties of social preferences and their distribution in the population also provides insights into which preference type supports specific redistributive policies, which has implications for how policy makers may design redistributive packages to maximize political support for them. |
| Keywords: | Social Preferences, Altruism, Inequality Aversion, Preference Heterogeneity, Demand for Redistribution |
| JEL: | D31 D72 H23 H24 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:ies:wpaper:e202308&r=upt |
| By: | Kunal Rajesh Lahoti; Shivani Hanji; Pratik Kamble; Kavita Vemuri |
| Abstract: | This study investigates the impact of loss-framing and individual risk attitude on willingness- to purchase insurance products utilizing a game-like interface as choice architecture. The application presents events as experienced in real life. Both financial and emotional loss-framing events are followed by choices to purchase insurance. The participant cohorts considered were undergraduate students and older participants; the latter group was further subdivided by income and education. The within-subject analysis reveals that the loss framing effect on insurance consumption is higher in the younger population, though contingent on the insurance product type. Health and accident insurance shows a negative correlation with risk attitudes for younger participants and a positive correlation with accident insurance for older participants. Risk attitude and life insurance products showed no dependency. The findings elucidate the role of age, income, family responsibilities, and risk attitude in purchasing insurance products. Importantly, it confirms the heuristics of framing/nudging. |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2310.13300&r=upt |
| By: | Sebastian Koehne |
| Abstract: | This paper introduces life expectancy inequality into a tractable Mirrleesian life-cycle model and characterizes the optimal income tax policy using theory and calibration. A positive association between life expectancy and income counteracts the well-known static pattern of declining marginal utility. As a result, the mechanical value of redistribution is reduced at all income levels. Moreover, the pension wedge becomes a novel determinant of optimal taxation, motivating relatively lower optimal tax rates for low earners and relatively higher optimal tax rates for high earners. Quantitatively, the effects of the mechanical value of redistribution dominate, and the optimal marginal tax rates fall by up to 10 percentage points when life expectancy is heterogeneous. |
| Keywords: | optimal taxation, redistribution, life expectancy, inequality |
| JEL: | D82 H21 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10684&r=upt |