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on Utility Models and Prospect Theory |
| By: | Somdeb Lahiri |
| Abstract: | We present a theory of expected utility with state-dependent linear utility functions for monetary returns, that incorporates the possibility of loss-aversion. Our results relate to first order stochastic dominance, mean-preserving spread, increasing-concave linear utility profiles and risk aversion. As an application of the expected utility theory developed here, we analyze the contract that a monopolist would offer in an insurance market that allowed for partial coverage of loss. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.19030 |
| By: | Federico Echenique; Quitz\'e Valenzuela-Stookey |
| Abstract: | Harsanyi (1955) showed that the only way to aggregate individual preferences into a social preference which satisfies certain desirable properties is ``utilitarianism'', whereby the social utility function is a weighted average of individual utilities. This representation forms the basis for welfare analysis in most applied work. We argue, however, that welfare analysis based on Harsanyi's version of utilitarianism may overlook important distributional considerations. We therefore introduce a notion of utilitarianism for discrete-choice settings which applies to \textit{social choice functions}, which describe the actions of society, rather than social welfare functions which describe society's preferences (as in Harsanyi). We characterize a representation of utilitarian social choice, and show that it provides a foundation for a family of \textit{distributional welfare measures} based on quantiles of the distribution of individual welfare effects, rather than averages. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2411.01315 |
| By: | Gerrit Bauch; Manuel Foerster |
| Abstract: | We conceptualize the communication of narratives as a cheap-talk game under model uncertainty. The sender has private information about the true data generating process of publicly observable data. The receiver is uncertain about how to interpret the data, but aware of the sender's incentives to strategically provide interpretations ("narratives") in her favor. We consider a general class of decision rules under ambiguity resolving the receiver's ignorance of the true data generating process, including maximum likelihood expected utility. The set of equilibria is characterized by a positive integer $N$: there is an equilibrium that induces $n$ different actions for each $1\leq n \leq N$. The diverting power of the sender is weaker than with a na\"ive receiver being unaware of the sender's incentives. Surprisingly, the receiver sometimes prefers to be na\"ive. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.23259 |
| By: | Danzer, Alexander M. (Catholic University of Eichstätt-Ingolstadt); Zeidler, Helen (Technical University of Munich) |
| Abstract: | This paper investigates time inconsistencies in food consumption based on a field experiment at a college canteen where participants repeatedly select and consume lunch menus. The design features a convex non-monetary budget in a natural 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: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17415 |
| By: | David Ryz\'ak; Martin \v{C}ern\'y |
| Abstract: | This paper studies the stochastic setting in cooperative games and suggests a solution concept based on second order stochastic dominance (SSD), which is often applied to robustly model risk averse behaviour of players in different economic and game theoretic models as it enables to model not specified levels of risk aversion among players. The main result of the paper connects this solution concept, \emph{SSD-core}, in case of uniform distribution of the game to cores of two deterministic cooperative games. Interestingly, balancedness of both of these games and convexity of one of these implies non-emptiness of the SSD-core. The opposite implication does not, in general, hold and leads to questions about intersections of cores of two games and their relations. Finally, we present an application of the SSD-core to the multiple newsvendors problem, where we provide a characterization of risk averse behaviour of players with an interpretation in terms of the model. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.19002 |
| By: | Batabyal, Amitrajeet; Beladi, Hamid |
| Abstract: | We analyze how a permanent shift in political power in a region that is creative a la Richard Florida affects tax policy and economic outcomes. There are three groups of individuals in our region: laborers or workers, creative class members or entrepreneurs, and the elites. The elites initially hold political power but then they lose it to the creative class. We describe the Markov perfect equilibrium of the political game between the above three groups. Specifically, we first derive the optimal taxes that are levied on the elites and on the creative class, by the creative class. Next, we compute the discounted utility of the elites when the creative class holds political power and compare this to their utility when they are in control of politics. |
| Keywords: | Creative Class, Elite, Entrepreneur, Political Game, Tax Policy |
| JEL: | H21 R11 |
| Date: | 2024–06–08 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122595 |
| By: | Carlos Alos Ferrer; Ernst Fehr; Michele Garagnani |
| Abstract: | Transitivity is perhaps the most fundamental axiom in economic models of choice. The empirical literature has regularly documented violations of transitivity, but these violations pose little problem if they are simply a result of somewhat-noisy decision making and not a reflection of the deterministic part of individuals’ preferences. However, what if transitivity violations reflect genuinely nontransitive preferences? And how can we separate nontransitive preferences from noise-generated transitivity violations–a problem that so far appears unresolved? To tackle these fundamental questions, we develop a theoretical framework which allows for nontransitive choices and behavioral noise. We then derive a non-parametric method which uses response times and choice frequencies to distinguish genuine (and potentially nontransitive) preferences from noise. We apply this method to two different datasets, demonstrating that a substantial proportion of transitivity violations reflect genuinely nontransitive preferences. These violations cannot be accounted for by any model using transitive preferences and noisy choices. |
| Keywords: | Transitivity, Stochastic choice, Preference Revelation |
| JEL: | D01 D81 D87 D91 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:lan:wpaper:413755644 |
| By: | Kremena Valkanova |
| Abstract: | We examine the effect of item arrangement on choices using a novel decision-making model based on the Markovian exploration of choice sets. This model is inspired by experimental evidence suggesting that the decision-making process involves sequential search through rapid stochastic pairwise comparisons. Our findings show that decision-makers following a reversible process are unaffected by item rearrangements, and further demonstrate that this property can be inferred from their choice behavior. Additionally, we provide a characterization of the class of Markovian models in which the agent makes all possible pairwise comparisons with positive probability. The intersection of reversible models and those allowing all pairwise comparisons is observationally equivalent to the well-known Luce model. Finally, we characterize the class of Markovian models for which the initial fixation does not impact the final choice and show that choice data reveals the existence and composition of consideration sets. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.22001 |
| By: | Carlos Alós-Ferrer; Ernst Fehr; Helga Fehr-Duda; Michele Garagnani |
| Abstract: | Recent contributions suggest that the empirical evidence for the common ratio effect could be explained as noise instead of underlying preferences under “common assumptions.” We revisit this argument using a more general method which allows to unambiguously dis- tinguish noise from preferences nonparametrically and with less stringent assumptions. The results are independent of the assumed behavioral model or how noise affects choices. Ap- plying this method to new experimental data we show that there is a systematic preference for the common ratio and the common consequence effects which cannot be explained by noise. |
| JEL: | C91 D81 D91 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:zur:econwp:459 |