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on Utility Models and Prospect Theory |
| By: | Marc Fleurbaey (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 nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - 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 nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Stéphane Zuber (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 nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | How can social prospects be evaluated and compared when there may be a risk on i) the actual allocations that people will receive, ii) the existence of these future people, and iii) their preferences? This paper investigates this question, which can arise when considering policies, such as climate policy, that affect people who do not yet exist. We start from the observation that there is no social ordering that meets minimal requirements of fairness, social rationality, and respect for people's ex ante preferences. We explore three ways around this impossibility. First, if we drop the ex ante Pareto requirement, we can obtain fair ex post criteria that take an (arbitrary) expected utility of an equally-distributed equivalent level of well-being. Second, if the social ordering is not an expected utility, we can obtain fair ex ante criteria that evaluate uncertain individual prospects with a certaintyequivalent measure of well-being. Third, if we accept that interpersonal comparisons rely on VNM utility functions even in absence of risk, we can construct expected utility social orderings that satisfy of a version of Pareto ex ante. |
| Keywords: | Fairness, Social risk, Intergenerational equity |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:hal:pseptp:halshs-05053424 |
| By: | Zhe Fei; Scott Robertson |
| Abstract: | We consider an equity market subject to risk from both unhedgeable shocks and default. The novelty of our work is that to partially offset default risk, investors may dynamically trade in a credit default swap (CDS) market. Assuming investment opportunities are driven by functions of an underlying diffusive factor process, we identify the certainty equivalent for a constant absolute risk aversion investor with a semi-linear partial differential equation (PDE) which has quadratic growth in both the function and gradient coefficients. For general model specifications, we prove existence of a solution to the PDE which is also the certainty equivalent. We show the optimal policy in the CDS market covers not only equity losses upon default (as one would expect), but also losses due to restricted future trading opportunities. We use our results to price default dependent claims though the principal of utility indifference, and we show that provided the underlying equity market is complete absent the possibility of default, the equity-CDS market is complete accounting for default. Lastly, through a numerical application, we show the optimal CDS policies are essentially static (and hence easily implementable) and that investing in CDS dramatically increases investor indirect utility. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.08085 |
| By: | Yasushi Sakai; Parfait Atchade-Adelomou; Ryan Jiang; Luis Alonso; Kent Larson; Ken Suzuki |
| Abstract: | This paper proposes a voting process in which voters allocate fractional votes to their expected utility in different domains: over proposals, other participants, and sets containing proposals and participants. This approach allows for a more nuanced expression of preferences by calculating the result and relevance within each node. We modeled this by creating a voting matrix that reflects their preference. We use absorbing Markov chains to gain the consensus, and also calculate the influence within the participating nodes. We illustrate this method in action through an experiment with 69 students using a budget allocation topic. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.13641 |
| By: | Ophir Friedler; Hu Fu; Anna Karlin; Ariana Tang |
| Abstract: | Platforms design the form of presentation by which sellers are shown to the buyers. This design not only shapes the buyers' experience but also leads to different market equilibria or dynamics. One component in this design is through the platform's mediation of the search frictions experienced by the buyers for different sellers. We take a model of monopolistic competition and show that, on one hand, when all sellers have the same inspection costs, the market sees no stable price since the sellers always have incentives to undercut each other, and, on the other hand, the platform may stabilize the price by giving prominence to one seller chosen by a carefully designed mechanism. This calls to mind Amazon's Buy Box. We study natural mechanisms for choosing the prominent seller, characterize the range of equilibrium prices implementable by them, and find that in certain scenarios the buyers' surplus improves as the search friction increases. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.14793 |