|
on Utility Models and Prospect Theory |
|
Issue of 2024‒07‒15
nineteen papers chosen by |
| By: | Neumärker, Bernhard; Weinel, Jette Leonie |
| Abstract: | Economic modeling of Universal Basic Income (UBI) often fails to consider how individuals' utility calculations shift with unconditional transfers. In this paper we further develop the model of our previous paper - The Implications of UBI on Utility Functions and Tax Revenue (Neumärker, B., Weinel, J., 2022). We contend that, while traditional fiscal models rely on an additively separable relationship between consumption and labor, the utility calculation for individuals influenced by UBI is better represented by a multiplicative relationship. This shift arises from the time sovereignty afforded by UBI, empowering individuals to become selfdetermined, creative, and intrinsically motivated. We explore the implications of the UBIadapted utility function on tax revenue. Specifically, we analyze the consumption tax revenue curve under UBI (multiplicative preferences) versus a means-tested welfare system (additive separable preferences). |
| Keywords: | Basic Income, Laffer Curve, Utility Function, Consumption Tax, Time sovereignty, Intrinsic Motivation |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:fribis:297983&r= |
| By: | Neumärker, Bernhard; Weinel, Jette |
| Abstract: | Economic modeling of Universal Basic Income (UBI) often fails to consider how individuals' utility calculations shift with unconditional transfers. In this paper we further develop the model of our previous paper - The Implications of UBI on Utility Functions and Tax Revenue (Neumärker, B., Weinel, J., 2022). We contend that, while traditional fiscal models rely on an additively separable relationship between consumption and labor, the utility calculation for individuals influenced by UBI is better represented by a multiplicative relationship. This shift arises from the time sovereignty afforded by UBI, empowering individuals to become selfdetermined, creative, and intrinsically motivated. We explore the implications of the UBIadapted utility function on tax revenue. Specifically, we analyze the consumption tax revenue curve under UBI (multiplicative preferences) versus a means-tested welfare system (additive separable preferences). |
| Keywords: | Basic Income, Laffer Curve, Utility Function, Consumption Tax, Time sovereignty, Intrinsic Motivation |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:cenwps:297978&r= |
| By: | Marek Kapera |
| Abstract: | In this article I study whether the interim preferences of the consumer can be expected to converge to their real preferences in the process of preference discovery. I construct a subjective expected utility model of the consumer, where the uncertainty results from the imperfect knowledge of their own preferences. This uncertainty is partially resolved by experimental consumption. Under the assumption that the subjective probability of the consumer satisfies learning monotonicity, I identify the equivalent conditions for the consumer to experiment. My results show that the interim preferences never fully converge to the real preferences of the consumer. Instead, the preference discovery either terminates, meaning that the consumer ceases to experiment, or only experiments within some neighborhood of the best currently known alternative, and never sufficiently explores their preferences. |
| Keywords: | Taste uncertainty, Preference discovery, Learning through consumption, Conditional preferences, Experimental preferences |
| JEL: | D11 D83 D91 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:sgh:kaewps:2024098&r= |
| By: | Mauricio Elizalde; Stephan Sturm |
| Abstract: | We aim to provide an intertemporal, cost-efficient consumption model that extends the consumption optimization inspired by the Distribution Builder, a tool developed by Sharpe, Johnson, and Goldstein. The Distribution Builder enables the recovery of investors' risk preferences by allowing them to select a desired distribution of terminal wealth within their budget constraints. This approach differs from the classical portfolio optimization, which considers the agent's risk aversion modeled by utility functions that are challenging to measure in practice. Our intertemporal model captures the dependent structure between consumption periods using copulas. This strategy is demonstrated using both the Black-Scholes and CEV models. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.16336&r= |
| By: | Johannes Hoelzemann; Ryan Webb; Erhao Xie |
| Abstract: | We study the falsifiability and identification of Quantal Response Equilibrium (QRE) when each player’s utility and error distribution are relaxed to be unknown non-parametric functions. Using variations of players’ choices across a series of games, we first show that both the utility function and the distribution of errors are non-parametrically over-identified. This result further suggests a straightforward testing procedure for QRE that achieves the desired type-1 error and maintains a small type-2 error. To apply this methodology, we conduct an experimental study of the matching pennies game. Our non-parametric estimates strongly reject the conventional logit choice probability. Moreover, when the utility and the error distribution are sufficiently flexible and heterogeneous, the quantal response hypothesis cannot be rejected for 70% of participants. However, strong assumptions such as risk neutrality, logistically distributed errors and homogeneity lead to substantially higher rejection rates. |
| Keywords: | Econometric and statistical methods; Economic models |
| JEL: | C14 C57 C92 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:24-24&r= |
| By: | Jingru Jia; Zehua Yuan; Junhao Pan; Paul McNamara; Deming Chen |
| Abstract: | When making decisions under uncertainty, individuals often deviate from rational behavior, which can be evaluated across three dimensions: risk preference, probability weighting, and loss aversion. Given the widespread use of large language models (LLMs) in decision-making processes, it is crucial to assess whether their behavior aligns with human norms and ethical expectations or exhibits potential biases. Several empirical studies have investigated the rationality and social behavior performance of LLMs, yet their internal decision-making tendencies and capabilities remain inadequately understood. This paper proposes a framework, grounded in behavioral economics, to evaluate the decision-making behaviors of LLMs. Through a multiple-choice-list experiment, we estimate the degree of risk preference, probability weighting, and loss aversion in a context-free setting for three commercial LLMs: ChatGPT-4.0-Turbo, Claude-3-Opus, and Gemini-1.0-pro. Our results reveal that LLMs generally exhibit patterns similar to humans, such as risk aversion and loss aversion, with a tendency to overweight small probabilities. However, there are significant variations in the degree to which these behaviors are expressed across different LLMs. We also explore their behavior when embedded with socio-demographic features, uncovering significant disparities. For instance, when modeled with attributes of sexual minority groups or physical disabilities, Claude-3-Opus displays increased risk aversion, leading to more conservative choices. These findings underscore the need for careful consideration of the ethical implications and potential biases in deploying LLMs in decision-making scenarios. Therefore, this study advocates for developing standards and guidelines to ensure that LLMs operate within ethical boundaries while enhancing their utility in complex decision-making environments. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.05972&r= |
| By: | Jean-Bernard Chatelain (Centre d'Economie de la Sorbonne, Paris School of Economics); Kirsten Ralf (ESCE International Business School) |
| Abstract: | Using the second order Taylor expansion of the Lagrangian of the Ramsey model of optimal savings, wealth is included in the quadratic loss function, and not only consumption. Its weight is given by the degree of concavity of the decreasing returns to scale production function times the marginal utility of consumption. The weight of consumption is given by the degree of concavity of the utility function. This quadratic loss function implies that the speed of convergence is explicitly driven by the trade-off between wealth smoothing (fostering convergence, related to technology) versus consumption smoothing (delaying convergence, related to preferences). By contrast, the second order Taylor expansion of the utility instead of the Lagrangian leads to a quadratic loss function with a weight of wealth equal to zero, which is false for a decreasing returns to scale production function |
| Keywords: | Linear quadratic approximation; wealth; consumption; savings; negative feedback; speed of convergence |
| JEL: | C61 C62 E43 E44 E47 E52 E58 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:mse:cesdoc:24006&r= |
| By: | Luca Anderlini (Department of Economics, Georgetown University); Joshua Teitlebaum (Georgetown Law Center, Georgetown University) |
| Abstract: | Part of a ship’s cargo is jettisoned in order to save the vessel and the remaining cargo from imminent peril. How should the loss be shared among the cargo owners? The law of general average, an ancient principle of maritime law, prescribes that the owners share the loss proportionally according to the respective values of their cargo. We analyze whether the law of general average is a truthful and efficient mechanism. That is, we investigate whether it induces truthful reporting of cargo values and yields a Pareto efficient allocation in equilibrium. We show that the law of general average is neither truthful nor efficient if owners have expected utility preferences, but is both truthful and efficient if owners have maxmin utility preferences. We discuss why maxmin behavior may be reasonable in the general average context. |
| Keywords: | General average, loss sharing, maritime law, maxmin, mutual insurance, truthful equilibrium, Pareto efficiency. |
| JEL: | C72 D82 G22 K39 |
| Date: | 2024–03–18 |
| URL: | https://d.repec.org/n?u=RePEc:geo:guwopa:gueconwpa~24-24-03&r= |
| By: | Liudong Chen; Bolun Xu |
| Abstract: | We investigate a flexible demand with a risk-neutral cost-saving objective in response to volatile electricity prices. We introduce the concept of prudent demand, which states that future price uncertainties will affect immediate consumption patterns, despite the price expectations remaining unchanged. We develop a theoretical framework and prove that demand exhibits prudence when the third-order derivative of its utility cost function is positive, and show a prudent demand demonstrates risk-averse behaviors despite the objective being risk-neutral. . Prudent demands exhibit skewness aversion, with increased price skewness elevating the cost associated with prudence. We validate our theoretical findings through numerical simulations and conclude their implications for demand response modeling and the future design of incentive-based demand response mechanisms. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.16356&r= |
| By: | Francesco Fabbri; Giulio Principi; Lorenzo Stanca |
| Abstract: | We represent preferences that exhibit absolute or relative attitudes towards ambiguity without assuming convexity of preferences. Our analysis is motivated by the recent experimental evidence by Baillon and Placido (2019) indicating that ambiguity becomes more tolerable as individuals are better off overall. Decreasing absolute ambiguity aversion is characterized by constant superadditive certainty equivalents and admits an act-dependent variational representation (Maccheroni et al., 2006). Decreasing relative ambiguity aversion relates to positive superhomogeneity and admits an act-dependent confidence preference representation (Chateauneuf and Faro, 2009). We apply our characterizations to retrieve a classic risk sharing result on the efficiency of trade and subjective beliefs of the individuals (Rigotti et al., 2008). |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.01343&r= |
| By: | Jean-Bernard Chatelain (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, 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); Kirsten Ralf (ESCE, International Business School - ESCE) |
| Abstract: | Using the second order Taylor expansion of the Lagrangian of the Ramsey model of optimal savings, wealth is included in the quadratic loss function, and not only consumption. Its weight is given by the degree of concavity of the decreasing returns to scale production function times the marginal utility of consumption. The weight of consumption is given by the degree of concavity of the utility function. This quadratic loss function implies that the speed of convergence is explicitly driven by the trade-off between wealth smoothing (fostering convergence, related to technology) versus consumption smoothing (delaying convergence, related to preferences). By contrast, the second order Taylor expansion of the utility instead of the Lagrangian leads to a quadratic loss function with a weight of wealth equal to zero, which is false for a decreasing returns to scale production function. |
| Abstract: | En utilisant le développement limité de Taylor à l'ordre deux du Lagrangien du modèle d'épargne optimale de Ramsey, la richesse est prise en compte dans la fonction de perte quadratique et pas seulement la consommation. La pondération de la richesse est donnée par le degré de concavité de la fonction de production à rendements décroissants multiplié par l'utilité marginale de la consommation. La pondération de la consommation est donnée par le degré de concavité de la fonction d'utilité. Cette fonction de perte quadratique implique que la vitesse de convergence vers l'équilibre dépend de l'arbitrage entre le lissage de la richesse (qui accélère la convergence) et le lissage de la consommation (qui retarde la convergence). En revanche, le développement limité de Taylor à l'ordre deux de l'utilité (au lieu du Lagrangien) met un poids de la richesse égal à zéro dans la fonction de perte quadratique, ce qui est faux si la fonction de production est à rendements strictement décroissants. |
| Keywords: | Linear quadratic approximation, Wealth, Consumption, Savings, Negative feedback, Speed of convergence, Richesse, Consommation, Epargne, Rétroaction négative, Vitesse de convergence, Approximation linéaire quadratique |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:hal:cesptp:halshs-04612845&r= |
| By: | David MASCLET (Univ Rennes, CNRS, CREM – UMR6211, F-35000 Rennes France and CIRANO, Montreal, Canada); David L. DICKINSON (Appalachian State University, IZA, ESI) |
| Abstract: | We present a theoretical framework of individual-decision making that incorporates both moral motivations and social influence into the utility function. The main idea of the paper is that individuals face a trade-off between their material individual interests and their desire to follow moral obligation. In our model, we assume that moral motivation is weak or conditional in the sense that it may be influenced by others’ actions. Specifically, in our framework one’s moral obligation is a combination of two main components: an autonomous component and a social component that captures the influence of others. Our theoretical framework is able to explain many stylized results commonly observed in the literature and suggests a different mechanism to explain economic behavior. |
| Keywords: | Behavioral Economics, Ethical Decision Making, Fairness |
| JEL: | C9 D9 D91 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:tut:cremwp:2024-04&r= |
| By: | Gregorio Curello; Ludvig Sinander |
| Abstract: | Most comparisons of preferences are instances of single-crossing dominance. We examine the lattice structure of single-crossing dominance, proving characterisation, existence and uniqueness results for minimum upper bounds of arbitrary sets of preferences. We apply these theorems to derive new comparative statics theorems for collective choice and under analyst uncertainty, to characterise a general 'maxmin' class of uncertainty-averse preferences over Savage acts, and to revisit the tension between liberalism and Pareto efficiency in social choice. |
| Keywords: | preference, lattice, comparative statics, risk-aversion, ambiguity, crown, diamond |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_563&r= |
| By: | Van-Quy Nguyen (Faculty of Mathematical Economics, National Economics University, Hanoi, Vietnam); Jean-Marc Bonnisseau (Université Paris 1 Panthéon-Sorbonne, Centre d'Economie de la Sorbonne, Paris School of Economics); Elena L. Del Mercato (Université Paris 1 Panthéon-Sorbonne, Centre d'Economie de la Sorbonne, Paris School of Economics) |
| Abstract: | We consider a pure exchange economy with consumption externalities in preferences. We study commodity taxes and lump-sum transfers schemes, which lead to equilibrium allocations where all individuals are strictly better off. We extend the result of Geanakoplos and Polemarchakis (2008) on the generic existence of Pareto improving policies with uniform taxes and equal transfers to general non-separable preferences, when the number of individuals is strictly smaller than the number of commodities. We also overcome this limitation by considering either uniform taxes with personalized lump-sum transfers, or personalized taxes with uniform lump-sum transfers. As in Geanakoplos and Polemarchakis (2008), we mainly use utility perturbations but we also provide a sufficient condition for ensuring the existence of Pareto improving policies without perturbing utilities |
| Keywords: | Consumption externalities; commodity taxes; lump-sum transfers; Pareto improvement |
| JEL: | D50 D60 D62 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:mse:cesdoc:24007&r= |
| By: | Ylenia Brilli; Simone Moriconi |
| Abstract: | This paper analyzes how culture affects the engagement of parents in child-rearing activities, and time allocations of parents inside the family. We use data from the World Value Survey to construct a country-specific measure of the value attached to obedience as a child quality, which we associate with the actual parenting behavior and time investments of first-and second-generation migrant parents in Australia. We show that migrant parents from countries in which obedience is more valued as an important child quality, are more likely to be warm and to enact discipline in their parent-child interactions. We also show that a higher value of obedience in the country of origin is associated with a shift of parental time from general care to playing activities, and from the weekdays to the weekends. These results are robust to a large set of sensitivity analyses, which account for omitted variable bias and selection. Finally, we provide evidence that this cultural value may feature a more egalitarian allocation of parenting vs. labor supply tasks at the household level, by increasing fathers’ parental time and mothers’ labor supply at the intensive margin. We interpret this as indirect evidence that fathers may have a greater marginal utility from parenting time than mothers, on average. |
| Keywords: | culture, parental investments, parenting, labor supply |
| JEL: | D10 J13 J15 J22 Z13 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11127&r= |
| By: | Li, Mengyu; Keyβer, Lorenz; Kikstra, Jarmo S.; Hickel, Jason; Brockway, Paul E.; Dai, Nicolas; Malik, Arunima; Lenzen, Manfred |
| Abstract: | Empirical evidence increasingly indicates that to achieve sufficiently rapid decarbonisation, high-income economies may need to adopt degrowth policies, scaling down less-necessary forms of production and demand, in addition to rapid deployment of renewables. Calls have been made for degrowth climate mitigation scenarios. However, so far these have not been modelled within the established Integrated Assessment Models (IAMs) for future scenario analysis of the energy-economy-emission nexus, partly because the architecture of these IAMs has growth ‘baked in’. In this work, we modify one of the common IAMs–MESSAGEix–to make it compatible with degrowth scenarios. We simulate scenarios featuring low and negative growth in a high-income economy (Australia). We achieve this by detaching MESSAGEix from its monotonically growing utility function, and by formulating an alternative utility function based on non-monotonic preferences. The outcomes from such modified scenarios reflect some characteristics of degrowth futures, including reduced aggregate production and declining energy and emissions. However, further work is needed to explore other key degrowth features such as sectoral differentiation, redistribution, and provisioning system transformation. |
| Keywords: | degrowth; energy-economy decoupling; Integrated Assessment Models; post-growth; Utility function |
| JEL: | N0 |
| Date: | 2023–12–08 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:123739&r= |
| By: | Moscati, Ivan |
| Abstract: | In 1961 Daniel Ellsberg published an article titled “Risk, Ambiguity, and the Savage Axioms” in the Quarterly Journal of Economics, which became a seminal contribution to the theory of decision-making under uncertainty. This paper analyzes Ellsberg’s 1961 classic, situates it within the context of decision-making theory in the 1950s and early 1960s and within the development of Ellsberg’s ideas, and provides an overview of the experimental and theoretical literature to which it gave rise. |
| Keywords: | ambiguity; decision theory; Ellsberg; Ellsberg paradox; uncertainty |
| JEL: | J1 F3 G3 |
| Date: | 2024–05–20 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:123761&r= |
| By: | Stefano BOSI; David DESMARCHELIER; Thai HA-HUY |
| Abstract: | From a dynamic perspective, the existing literature on renewable resources in a Ramsey economy is puzzling. On the one hand, the central plannerís solution leads to the occurrence of limit cycles around the lower steady state (Wirl, 2004); on the other hand, limit cycles arise in a market economy around the higher steady state (Bosi and Desmarchelier, 2018). To reconcile these Öndings, we study the competitive equilibrium of a discrete-time Ramsey-Cass-Koopmans model with a renewable resource, where preferences are represented by two di§erent utility functions with Constant Static Elasticity of Substitution (CSES) and Constant Intertemporal Elasticity of Substitution (CIES). In the CSES case, we recover the dynamics highlighted by Wirl (2004), while, in the CIES case, the ones obtained by Bosi and Desmarchelier (2018). Moreover, this conclusion is robust under two alternative regeneration processes for the resource (power and logistic laws). In other words, the dynamics seems to depend more on the preference structure than on the market structure (central planner versus market economy). |
| Keywords: | Ramsey model, reproduction law, pollution, two-period and limit cycles. |
| JEL: | C61 E32 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ulp:sbbeta:2024-23&r= |
| By: | Dmitri V. Vinogradov; Michael J. Lamla; Yousef Makhlouf |
| Abstract: | Pessimismis commonly associated with higher inflation expectations; however, raw survey data show the opposite. Theoretically, the true relationship may be obscured by a bias in survey responses: risk-averse respondents adjust low expectations upward (high expectations downward) to minimize the expected disutility from reporting errors; pessimism amplifies this effect. While the error-minimization objective is typically associated with professional forecasters, consumers are conventionally assumed to report expectations that inform everyday consumption decisions, and to have no incentives to misreport beliefs. Yet, in our surveys, riskaversion and pessimism reduce reported expectations on average, with opposite effects for low and highbeliefs, unexplainable by personal finance, expertise, or macroeconomic conditions. These findings contradict the consumption-choice view but align well with the forecasting view. With the bias offset, pessimism raises expectations, and risk attitudes play no role |
| Keywords: | surveys, inflation expectations, riskaversion, ambiguity aversion, pessimism, bias. |
| JEL: | E52 E58 D89 |
| Date: | 2024–02 |
| URL: | https://d.repec.org/n?u=RePEc:gla:glaewp:2024_02&r= |