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on Utility Models and Prospect Theory |
| By: | Wenyuan Li; Pengyu Wei |
| Abstract: | This paper investigates the optimal consumption, investment, and life insurance/annuity decisions for a family in an inflationary economy under money illusion. The family can invest in a financial market that consists of nominal bonds, inflation-linked bonds, and a stock index. The breadwinner can also purchase life insurance or annuities that are available continuously. The family's objective is to maximize the expected utility of a mixture of nominal and real consumption, as they partially overlook inflation and tend to think in terms of nominal rather than real monetary values. We formulate this life-cycle problem as a random horizon utility maximization problem and derive the optimal strategy. We calibrate our model to the U.S. data and demonstrate that money illusion increases life insurance demand for young adults and reduces annuity demand for retirees. Our findings indicate that the money illusion contributes to the annuity puzzle and highlights the role of financial literacy in an inflationary environment. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.20128 |
| By: | Alexander M. Danzer; Helen Zeidler |
| Abstract: | This paper investigates time inconsistencies in food consumption based on a field experiment at a college canteen where participants repeatedly select and con- sume lunch menus. The design features a convex non-monetary budget in a natu- ral environment and satisfies the consume-on-receipt assumption. Leveraging 3, 666 choices of different food healthiness, we find no time inconsistency at the meal level. Utility weight estimates at the dish level reveal that consumers balance healthiness between food categories. Individuals who exert self-control take up a commitment device as soon as available, while non-committers are present-biased. Dynamic inconsistencies in food and money choices are independent. |
| Keywords: | Field Experiment, Dynamic Inconsistency, Commitment, Food Consumption |
| JEL: | D12 D01 C93 D91 I12 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:bav:wpaper:239_danzer_zeidler.rdf |
| By: | Debopam Bhattacharya; Ekaterina Oparina; Qianya Xu |
| Abstract: | We analyze demand settings where heterogeneous consumers maximize utility for product attributes subject to a nonlinear budget constraint. We develop nonparametric methods for welfare-analysis of interventions that change the constraint. Two new findings are Roy's identity for smooth, nonlinear budgets, which yields a Partial Differential Equation system, and a Slutsky-like symmetry condition for demand. Under scalar unobserved heterogeneity and single-crossing preferences, the coefficient functions in the PDEs are nonparametrically identified, and under symmetry, lead to path-independent, money-metric welfare. We illustrate our methods with welfare evaluation of a hypothetical change in relationship between property rent and neighborhood school-quality using British microdata. |
| Keywords: | hedonic model, nonlinear budget, nonparametric identification, welfare, compensating/equivalent variation, partial differential equation, Slutsky symmetry, Roy’s Identity, Path Independence. |
| Date: | 2024–11–08 |
| URL: | https://d.repec.org/n?u=RePEc:cep:cepdps:dp2050 |
| By: | Cavapozzi, Danilo (Università Ca’ Foscari di Venezia); Francesconi, Marco (University of Essex); Nicoletti, Cheti (University of York) |
| Abstract: | Using UK longitudinal data on dual-earner couples, this paper estimates a model of intrahousehold housework decisions, which combines a randomized experimental framework eliciting counterfactual choices with gender norms differences across ethnicities and cohorts to identify the impacts of individual preferences and gender identity norms. Equal sharing of tasks yields greater utility for both men and women, with women disliking domestic chores as much as men. Although couples would want to use housework arrangements to compensate for differentials in labor market involvement, women end up performing a substantially larger share of housework. This is not due to specialization, rather social norms play a key role. Exposure to more egalitarian gender attitudes significantly increases the probability of choosing an equal share of housework. Were attitudes evened up to the most progressive levels observed in the sample, women doing more housework than their partners would stop to be the norm already among present-day households, except for households with children. |
| Keywords: | intrahousehold allocation of chores, labor supply, vignettes, gender identity norms, gender gaps |
| JEL: | C25 C26 D13 J16 J22 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17370 |
| By: | Bell, Clive (Heidelberg University); Gersbach, Hans (ETH Zurich); Haller, Hans (Virginia Tech) |
| Abstract: | When formal insurance is unavailable, mutual insurance among households can serve as an alternative. This paper analyzes a game between economic agents facing uncertainty and maximizing discounted utility without enforceable contracts or access to capital markets. While autarky is always a possible outcome, under high discount factors, a mutually beneficial trigger-strategy equilibrium can be achieved. Full insurance is possible with strongly negatively correlated endowments, while partial insurance is generally feasible. The analysis highlights environments wherein varying levels of insurance can emerge, with applications to real-world institutional contexts. |
| Keywords: | mutual insurance, risk sharing, group formation |
| JEL: | C72 C73 D80 G20 O11 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17406 |
| By: | Anna Esslinger; Katharina Pfeil; Lars P. Feld |
| Abstract: | Are the effects of tax aversion on labor supply symmetric? In a real-effort online experiment, participants are exposed to manipulated wages and taxes after first experiencing the same reference wage. More participants change their labor supply when encountering a tax increase than when experiencing an equivalent wage decrease. However, there is no significant difference in labor supply change between the groups that received tax decreases and wage increases. Tax averse behavior existing only in the presence of net wage decreases implies asymmetric labor supply responses to taxation. |
| Keywords: | tax aversion, loss aversion, labor supply asymmetry, online experiment |
| JEL: | H20 H30 D91 J22 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11317 |
| By: | Armando Holzknecht; Jürgen Huber; Michael Kirchler; Tibor Neugebauer |
| Abstract: | In a pre-registered laboratory asset market study, we investigate dynamics of asset markets with zero (or close to zero) fundamental values. We introduce the “greater fool asset market game” with a zero-value token, whose price doubles in each period. We design several treatments, which differ in terms of whether the fundamental value is zero for sure, and whether the rather low probability of non-zero fundamentals is known (Risk) or not (Ambiguity). We find that prices in markets with zero fundamental value are clearly above zero. Furthermore, we report that prices in treatment Ambiguity are substantially higher than those in the baseline and in treatment Risk. Finally, we show that beliefs regarding the asset’s value and others’ participation explain individual market participation. |
| Keywords: | speculative bubbles, greater fool, behavioral economics, experimental finance |
| JEL: | C91 C92 G12 G41 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:inn:wpaper:2024-09 |
| By: | Leo Ardon; Benjamin Patrick Evans; Deepeka Garg; Annapoorani Lakshmi Narayanan; Makada Henry-Nickie; Sumitra Ganesh |
| Abstract: | We develop a novel two-layer approach for optimising mortgage relief products through a simulated multi-agent mortgage environment. While the approach is generic, here the environment is calibrated to the US mortgage market based on publicly available census data and regulatory guidelines. Through the simulation layer, we assess the resilience of households to exogenous income shocks, while the optimisation layer explores strategies to improve the robustness of households to these shocks by making novel mortgage assistance products available to households. Households in the simulation are adaptive, learning to make mortgage-related decisions (such as product enrolment or strategic foreclosures) that maximize their utility, balancing their available liquidity and equity. We show how this novel two-layer simulation approach can successfully design novel mortgage assistance products to improve household resilience to exogenous shocks, and balance the costs of providing such products through post-hoc analysis. Previously, such analysis could only be conducted through expensive pilot studies involving real participants, demonstrating the benefit of the approach for designing and evaluating financial products. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2411.00563 |
| By: | Jonas Blessing; Michael Kupper; Alessandro Sgarabottolo |
| Abstract: | We discuss the asymptotic behaviour of risk-based indifference prices of European contingent claims in discrete-time financial markets under volatility uncertainty as the number of intermediate trading periods tends to infinity. The asymptotic risk-based prices form a strongly continuous convex monotone semigroup which is uniquely determined by its infinitesimal generator and therefore only depends on the covariance of the random factors but not on the particular choice of the model. We further compare the risk-based prices with the worst-case prices given by the $G$-expectation and investigate their asymptotic behaviour as the risk aversion of the agent tends to infinity. The theoretical results are illustrated with several examples and numerical simulations showing, in particular, that the risk-based prices lead to a significant reduction of the bid-ask spread compared to the worst-case prices. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2411.00713 |