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on Utility Models and Prospect Theory |
| By: | Gerrit Meyerheim |
| Abstract: | This paper integrates tail aversion, implemented via a one-period entropic tilt, with rare disasters in a consumption-based asset pricing model with CRRA utility to jointly address the equity premium and risk-free rate puzzles. The model delivers closed-form expressions for the risk-free rate and asset moments, pushes out the Hansen-Jagannathan bound, implies a low risk-free rate via diffusion and disaster channels, and delivers natural upper and lower bounds of risk aversion. Calibrated to long-run return data and disciplined by disaster evidence, the model matches average returns, volatility, and a low real risk-free rate with very modest risk aversion. |
| Keywords: | equity premium puzzle, risk-free rate puzzle, rare disasters, entropic tilt, multiplier (KL) preferences, robust control, consumption-based asset pricing |
| JEL: | G12 E44 E43 E21 D81 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12231 |
| By: | Gabriel Montes-Rojas; Fernando Toledo; Nicol\'as Bertholet; Kevin Corfield |
| Abstract: | We study optimal monetary policy when a central bank maximizes a quantile utility objective rather than expected utility. In our framework, the central bank's risk attitude is indexed by the quantile index level, providing a transparent mapping between hawkish/dovish stances and attention to adverse macroeconomic realizations. We formulate the infinite-horizon problem using a Bellman equation with the quantile operator. Implementing an Euler-equation approach, we derive Taylor-rule-type reaction functions. Using an indirect inference approach, we derive a central bank risk aversion implicit quantile index. An empirical implementation for the US is outlined based on reduced-form laws of motion with conditional heteroskedasticity, enabling estimation of the new monetary policy rule and its dependence on the Fed risk attitudes. The results reveal that the Fed has mostly a dovish-type behavior but with some periods of hawkish attitudes. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2510.24362 |
| By: | Wilfried Kuissi-Kamdem |
| Abstract: | This paper considers a stochastic control problem with Epstein-Zin recursive utility under partial information (unknown market price of risk), in which an investor is constrained to a liability at the end of the investment period. Introducing liabilities is the main novelty of the model and appears for the first time in the literature of recursive utilities. Such constraint leads to a fully coupled forward-backward stochastic differential equation (FBSDE), which well-posedness has not been addressed in the literature. We derive an explicit solution to the FBSDE, contrasting with the existence and uniqueness results with no explicit expression of the solutions typically found in most related literature. Moreover, under minimal additional assumptions, we obtain the Malliavin differentiability of the solution of the FBSDE. We solve the problem completely and find the expression of the controls and the value function. Finally, we determine the utility loss that investors suffer from ignoring the fact that they can learn about the market price of risk. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2511.02158 |
| By: | Bailey, Ralph W. (Department of Economics, University of Birmingham, UK); Kozlovskaya, Maria (Economics, Finance and Entrepreneurship Department, Aston Business School, Aston University, UK); Ray, Indrajit (Cardiff Business School, Cardiff University) |
| Abstract: | We study mixed-strategy equilibria in a two-good buy-and-sell strategic market game à la Shapley–Shubik. We show that expected utility need not be quasiconcave in strategies, creating difficulties for characterising mixed equilibria. We prove that any mixed Nash profile in which each player mixes over only two positive bids is purifiable and the implied outcome is a mixture over pure equilibria. |
| Keywords: | Mixed bids; Mixed strategy Nash equilibrium; Strategic market games |
| JEL: | C72 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:cdf:wpaper:2025/21 |
| By: | Andrea Modena; Luca Regis; Giorgio Rizzini |
| Abstract: | In this paper, we invesstigate how mortality risk affects agents optimal decisions and asset prices within a general equilibrium framework. In our model, risk averse households facing a stochastic mortality rate allocate their net worth among consumption, risky capital production, and risk-free bonds to maximise intertemporal utility. In this setting, we show that a negative and time-varying correlation exists between mortality and risky asset prices, even when production and mortality risks are mutually independent. The correlation arises because higher mortality rates reduce the incentive to save for the future, leading to increased current consumption and decreased capital investment. As a result, higher mortality lowers the prices of risky capital and raises the risk-free rate in equilibrium. Calibrated simulations suggest that endogenous price effects account for the largest share of welfare gains and losses following sharp changes in mortality, such as pandemics or rapid increases in longevity. |
| Keywords: | equilibrium; mortality risk; portfolio choice; stochastic optimal control |
| JEL: | C6 G11 G52 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_709 |
| By: | Hurmeranta, Risto; Lyytikäinen, Teemu |
| Keywords: | Nominal loss aversion, housing market, household mobility, R21, R23, R31, fi=Asuntopolitiikka|sv=Bostadspolitik|en=Housing policy|, |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:fer:wpaper:178 |
| By: | Maarten P. Scholl; Mahmoud Mahfouz; Anisoara Calinescu; J. Doyne Farmer |
| Abstract: | While investment funds publicly disclose their objectives in broad terms, their managers optimize for complex combinations of competing goals that go beyond simple risk-return trade-offs. Traditional approaches attempt to model this through multi-objective utility functions, but face fundamental challenges in specification and parameterization. We propose a generative framework that learns latent representations of fund manager strategies without requiring explicit utility specification. Our approach directly models the conditional probability of a fund's portfolio weights, given stock characteristics, historical returns, previous weights, and a latent variable representing the fund's strategy. Unlike methods based on reinforcement learning or imitation learning, which require specified rewards or labeled expert objectives, our GAN-based architecture learns directly from the joint distribution of observed holdings and market data. We validate our framework on a dataset of 1436 U.S. equity mutual funds. The learned representations successfully capture known investment styles, such as "growth" and "value, " while also revealing implicit manager objectives. For instance, we find that while many funds exhibit characteristics of Markowitz-like optimization, they do so with heterogeneous realizations for turnover, concentration, and latent factors. To analyze and interpret the end-to-end model, we develop a series of tests that explain the model, and we show that the benchmark's expert labeling are contained in our model's encoding in a linear interpretable way. Our framework provides a data-driven approach for characterizing investment strategies for applications in market simulation, strategy attribution, and regulatory oversight. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2510.26165 |
| By: | Yukihiko Funaki; Yukio Koriyama; Satoshi Nakada |
| Abstract: | Some well-known solutions for cooperative games with transferable utility (TU-games), such as the Banzhaf value, the Myerson value, and the Aumann-Dreze value, fail to satisfy efficiency, although they possess other desirable properties. This paper proposes a new approach to restore efficiency by extending any underlying solution to an efficient one, through what we call an efficient extension operator. We consider novel axioms for an efficient extension operator and characterize the egalitarian surplus sharing method and the proportional sharing method in a unified manner. These results can be considered as new justifications for the f-ESS values and the f-PS values introduced by Funaki and Koriyama (2025), which are generalizations of the equal surplus sharing value and the proportional sharing value. Our results offer an additional rationale for the values with an arbitrary underlying solution. As applications, we develop an efficient-fair extension of the solutions for the TU-games with communication networks and its variant for TU-games with coalition structures. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2510.24388 |
| By: | Pietro Dall’Ara (University of Naples Federico II and CSEF) |
| Abstract: | This paper studies the persuasion of a receiver who accesses information only if she exerts costly attention effort. A sender designs an experiment to persuade the receiver to take a specific action. The experiment affects the receiver’s attention effort, that is, the probability that she updates her beliefs. As an implication, persuasion has two margins: extensive (effort) and intensive (action). The receiver’s utility exhibits a supermodularity property in information and effort. By leveraging this property, we establish a general equivalence between experiments and persuasion mechanisms à la Kolotilin et al. (2017). In applications, the sender’s optimal strategy involves censoring favorable states. |
| Keywords: | persuasion, inattention, information acquisition; information design. |
| JEL: | D82 D83 D91 |
| Date: | 2025–10–27 |
| URL: | https://d.repec.org/n?u=RePEc:sef:csefwp:766 |
| By: | Kimiko Terai (Faculty of Economics, Keio University) |
| Abstract: | This study examines interjurisdictional tax competition aimed at attracting portfolio investments by foreign creditors in sovereign bonds and corporate loans. In each of two jurisdictions, one with lower and the other with higher capital, governments maximize workers’ utility by choosing the volume of sovereign bond issuance to finance public inputs, the tax rate on creditors’ interest income, and the degree of compliance with bilateral treaty provisions concerning information exchange on creditors’ income. Under a bilateral treaty mandating only information exchange, the jurisdiction with initially lower capital tends to set a lower tax rate and exert less compliance effort, effectively functioning as a tax haven. In contrast, the jurisdiction with higher capital imposes a higher tax rate and demonstrates greater compliance, benefiting from the residence principle due to its substantial global interest income. Alternatively, under a bilateral treaty that combines information exchange with a withholding tax at source on foreign creditors, the two jurisdictions set the same tax rate on domestic creditors. This inadvertently weakens the incentives for the jurisdiction with higher capital to exchange information. These findings suggest that the specific design of international tax cooperation agreements critically shapes jurisdictions’ fiscal behavior, leading to divergent outcomes despite their shared objective of implementing residence-based taxation. |
| Keywords: | tax haven, interest income tax, home bias, Tax Information Exchange Agreement, Double Taxation Agreement |
| JEL: | H26 H54 H63 H73 |
| Date: | 2025–10–27 |
| URL: | https://d.repec.org/n?u=RePEc:keo:dpaper:dp2025-024 |
| By: | Amir Ashour Novirdoust (EWI); Pia Hoffmann-Willers (EWI); Julian Keutz (EWI) |
| Abstract: | This paper develops an analytical model of sequential electricity markets in which renewable and conventional producers compete in two stages. Building on previous work, we introduce risk-averse renewable producers and distinguish between competitive and oligopolistic renewable producers. The model captures strategic bidding behavior under uncertainty in renewable production and limited flexibility of conventional producers in the second stage. Our results show that risk aversion amplifies strategic withholding in oligopolistic settings, thereby increasing the forward premium. This effect intensifies when conventional producers are less flexible. While risk aversion has no impact on welfare under perfect competition or when conventional producers are fully flexible, its interaction with market power and supply-side inflexibility generates welfare losses. In a heterogeneous market structure of renewable producers, competitive producers benefit from higher prices caused by the withholding of oligopolistic producers, particularly when those producers are risk-averse. |
| Keywords: | Sequential Markets; Strategic Bidding; Risk Aversion; Market Power; Renewable Energy |
| JEL: | D43 D81 L13 L94 Q21 |
| Date: | 2025–11–05 |
| URL: | https://d.repec.org/n?u=RePEc:ris:ewikln:021748 |
| By: | Evan M. Calford; Anujit Chakraborty |
| Abstract: | We propose the Validated Random Incentive Scheme (VRIS)—an enhancement of the standard Random Incentive Scheme (RIS)—that enables internal validation of RIS’s incentive compatibility (IC) without altering an experiment’s core design. The key innovation is that researchers can observe each subject under both RIS and single-choice incentives, enabling direct withinperson comparisons that form the basis for testing IC. We derive a set of testable predictions from assumptions about the structure of random noise in decision making. In an online experiment involving three risky decisions and a perception task, we use the VRIS design to compare behavior under the RIS with that under single-choice incentives. We find that the RIS distorts the marginal distribution of choices in two of the four decisions and the joint distributions in five of six decision-pairs. In contrast, our novel VRIS directly measures all four marginal distributions under single-choice incentives and enables recovery of undistorted pairwise distributions in all but one case. |
| Keywords: | Experimental Economics, Random Incentive Scheme, Incentive Compatibility, Stochastic Choice |
| JEL: | C90 D81 D90 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:acb:cbeeco:2025-705 |
| By: | Peng Liu; Alexander Schied |
| Abstract: | In this paper, we investigate the Lambda Value-at-Risk ($\Lambda$VaR) under ambiguity, where the ambiguity is represented by a family of probability measures. We establish that for increasing Lambda functions, the robust (i.e., worst-case) $\Lambda$VaR under such an ambiguity set is equivalent to $\Lambda$VaR computed with respect to a capacity, a novel extension in the literature. This framework unifies and extends both traditional $\Lambda$VaR and Choquet quantiles (Value-at-Risk under ambiguity). We analyze the fundamental properties of this extended risk measure and establish a novel equivalent representation for $\Lambda$VaR under capacities with monotone Lambda functions in terms of families of downsets. Moreover, explicit formulas are derived for robust $\Lambda$VaR when ambiguity sets are characterized by $\phi$-divergence and the likelihood ratio constraints, respectively. We further explore the applications in risk sharing among multiple agents. We demonstrate that the family of risk measures induced by families of downsets is closed under inf-convolution. In particular, we prove that the inf-convolution of $\Lambda$VaR with capacities and monotone Lambda functions is another$\Lambda$VaR under a capacity. The explicit forms of optimal allocations are also derived. Moreover, we obtain more explicit results for risk sharing under ambiguity sets characterized by $\phi$-divergence and likelihood ratio constraints. Finally, we explore comonotonic risk-sharing for $\Lambda$VaR under ambiguity. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2511.00717 |
| By: | Kaibalyapati Mishra |
| Abstract: | In this paper, I develop a refinement of stability for matching markets with incomplete information. I introduce Information-Credible Pairwise Stability (ICPS), a solution concept in which deviating pairs can use credible, costly tests to reveal match-relevant information before deciding whether to block. By leveraging the option value of information, ICPS strictly refines Bayesian stability, rules out fear-driven matchings, and connects belief-based and information-based notions of stability. ICPS collapses to Bayesian stability when testing is uninformative or infeasible and coincides with complete-information stability when testing is perfect and free. I show that any ICPS-blocking deviation strictly increases total expected surplus, ensuring welfare improvement. I also prove that ICPS-stable allocations always exist, promote positive assortative matching, and are unique when the test power is sufficiently strong. The framework extends to settings with non-transferable utility, correlated types, and endogenous or sequential testing. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2510.22750 |
| By: | Ayush Sawarni; Sahasrajit Sarmasarkar; Vasilis Syrgkanis |
| Abstract: | This paper investigates the integration of response time data into human preference learning frameworks for more effective reward model elicitation. While binary preference data has become fundamental in fine-tuning foundation models, generative AI systems, and other large-scale models, the valuable temporal information inherent in user decision-making remains largely unexploited. We propose novel methodologies to incorporate response time information alongside binary choice data, leveraging the Evidence Accumulation Drift Diffusion (EZ) model, under which response time is informative of the preference strength. We develop Neyman-orthogonal loss functions that achieve oracle convergence rates for reward model learning, matching the theoretical optimal rates that would be attained if the expected response times for each query were known a priori. Our theoretical analysis demonstrates that for linear reward functions, conventional preference learning suffers from error rates that scale exponentially with reward magnitude. In contrast, our response time-augmented approach reduces this to polynomial scaling, representing a significant improvement in sample efficiency. We extend these guarantees to non-parametric reward function spaces, establishing convergence properties for more complex, realistic reward models. Our extensive experiments validate our theoretical findings in the context of preference learning over images. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2505.22820 |
| By: | Scoppa, Vincenzo (University of Calabria); Spanò, Idola Francesca (University of Calabria) |
| Abstract: | Gender gaps in labor market outcomes have traditionally been attributed to differences in individual productivity or to discrimination. More recently, several studies have documented the role of gender differences in psychological attitudes. Rather than using data on realized wages, we rely on data on reservation wages – the lowest wage workers are willing to accept – for a sample of Italian graduates. Reservation wages reflect individual attitudes and beliefs more directly, while being less affected by employer discrimination. We first relate reservation wages to educational background, individual characteristics, and family background, and investigate how they depend on labor market expectations. We then analyze how reservation wages depend on preferences over specific job attributes, such as permanent positions, geographical mobility, etc. Applying the Gelbach decomposition to quantify the contribution of each factors, we find a substantial role for preferences for job attributes and expectations. However, our estimates reveal a large unexplained component which is likely driven by gender differences in psychological and social attitudes, such as risk aversion, overconfidence and adherence to social norms. |
| Keywords: | Psychological Attitudes, Graduate Labor Market, Reservation Wages, Gender Gaps, Behavioral Economics |
| JEL: | J16 J32 D83 D91 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18230 |
| By: | Pablo Brañas-Garza (Universidad Loyola Andalucía); Antonio M. Espín (Universidad de Granada); Diego Jorrat (Universidad de Sevilla/Loyola Behavioral Lab) |
| Abstract: | We conducted an online Dictator Game experiment (N = 1, 195) to test three hypotheses about the role of monetary incentives in prosocial behavior. First, we examined whether real incentives reduce the dispersion of responses compared to hypothetical ones. Surprisingly, we found the opposite: hypothetical responses were less dispersed, with choices clustering around the egalitarian split. This pattern held in a replication (N = 308) with higher stakes (£5), offering no support for the first hypothesis. Second, we tested whether real incentives—by involving actual monetary consequences—lead to more selfish decisions, as they are expected to reveal true preferences. With £1 stakes, no significant differences emerged across conditions. However, when the stake was increased to £5, participants became more selfish under real incentives, supporting the second hypothesis only when the amount at stake is substantial. Third, we explored whether probabilistic payments differ behaviorally from certain ones. At low stakes, probabilistic incentives resembled real ones. But with higher stakes, real and probabilistic outcomes diverged, suggesting participants respond to expected value only when it is meaningful. Finally, in a separate study (N = 299), we found that many participants misunderstood hypothetical-payment instructions. Only explicit phrasing eliminated this confusion, underscoring the importance of precise wording in experimental design. |
| Keywords: | Monetary incentives, egalitarianism, hyper-altruism, selfishness, dictator game |
| JEL: | D64 D91 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:aoz:wpaper:376 |
| By: | Banerjee, Swapnendu; Chakraborty, Somenath |
| Abstract: | We examine the impact of social preferences on the choice between individual production and team production. An inequity-averse principal can hire a single or a team of two agents to work on a single project. The agents are inequity-averse with respect to the principal. We show that even without ‘synergy’ a moderately inequity-averse principal can opt for team production. Thus we provide an additional rationale for the empirically observed prevalence of team based production in terms of the possible existence of social preferences. For sufficiently inequity-averse principal the incentive for team production remains the same across short-term and long-term relationships. |
| Keywords: | Social Preferences; Inequity Aversion; Individual Production; Team Production; Synergy. |
| JEL: | D21 D86 L23 |
| Date: | 2025–08–15 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125933 |
| By: | Gabriel D. Patr\'on; Di Zhang; Lavinia M. P. Ghilardi; Evelin Blom; Maldon Goodridge; Erik Solis; Hamidreza Jahangir; Jorge Angarita; Nandhini Ganesan; Kevin West; Nilay Shah; Calvin Tsay |
| Abstract: | Energy storage can promote the integration of renewables by operating with charge and discharge policies that balance an intermittent power supply. This study investigates the scheduling of energy storage assets under energy price uncertainty, with a focus on electricity markets. A two-stage stochastic risk-constrained approach is employed, whereby electricity price trajectories or specific power markets are observed, allowing for recourse in the schedule. Conditional value-at-risk is used to quantify tail risk in the optimization problems; this allows for the explicit specification of a probabilistic risk limit. The proposed approach is tested in an integrated hydrogen system (IHS) and a battery energy storage system (BESS). In the joint design and operation context for the IHS, the risk constraint results in larger installed unit capacities, increasing capital cost but enabling more energy inventory to buffer price uncertainty. As shown in both case studies, there is an operational trade-off between risk and expected reward; this is reflected in higher expected costs (or lower expected profits) with increasing levels of risk aversion. Despite the decrease in expected reward, both systems exhibit substantial benefits of increasing risk aversion. This work provides a general method to address uncertainties in energy storage scheduling, allowing operators to input their level of risk tolerance on asset decisions. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2510.27528 |
| By: | Ce Li; Qianfan Zhang; Weiqiang Zheng |
| Abstract: | We study the welfare of a mechanism in a dynamic environment where a learning investor can make a costly investment to change her value. In many real-world problems, the common assumption that the investor always makes the best responses, i.e., choosing her utility-maximizing investment option, is unrealistic due to incomplete information in a dynamically evolving environment. To address this, we consider an investor who uses a no-regret online learning algorithm to adaptively select investments through repeated interactions with the environment. We analyze how the welfare guarantees of approximation allocation algorithms extend from static to dynamic settings when the investor learns rather than best-responds, by studying the approximation ratio for optimal welfare as a measurement of an algorithm's performance against different benchmarks in the dynamic learning environment. First, we show that the approximation ratio in the static environment remains unchanged in the dynamic environment against the best-in-hindsight benchmark. Second, we provide tight characterizations of the approximation upper and lower bounds relative to a stronger time-varying benchmark. Bridging mechanism design with online learning theory, our work shows how robust welfare guarantees can be maintained even when an agent cannot make best responses but learns their investment strategies in complex, uncertain environments. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2511.01157 |
| By: | Natalia Fabra (CEMFI, Centro de Estudios Monetarios y Financieros); Gerard Llobet (CEMFI, Centro de Estudios Monetarios y Financieros) |
| Abstract: | This paper examines the limitations of spot markets in providing adequate investment incentives to support zero-carbon investments in electricity markets. In contrast, properly designed long-term contracts have the potential to mitigate price volatility and facilitate the funding of the investments. A theoretical model is developed to analyze contract design under conditions of moral hazard and adverse selection, emphasizing the trade-offs that arise when exposing firms to price and quantity risk. The findings inform optimal contract design for nuclear and renewable energy projects, offering policy recommendations to enhance investment incentives while minimizing productive inefficiencies and excessive rents. |
| Keywords: | Contract design, adverse selection, moral hazard, risk aversion, renewable energies, nuclear power plants. |
| JEL: | L13 L94 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:cmf:wpaper:wp2025_2521 |