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on Utility Models and Prospect Theory |
| By: | Crispin Cooper (Cardiff University (Computer Science)); Ana Fredrich (Cardiff University (Computer Science)); Tommaso Reggiani (Cardiff University (Business); Masaryk University, Faculty of Economics and Administration, Brno, Czech Republic); Wouter Poortinga (Cardiff University (Architecture - Psychology)) |
| Abstract: | How should well-being be prioritised in society, and what trade-offs are people willing to make between fairness and personal well-being? We investigate these questions using a stated preference experiment with a nationally quasi-representative UK sample (n = 300), in which participants evaluated life satisfaction outcomes for both themselves and others under conditions of uncertainty. Individual-level utility functions were estimated using an Expected Utility Maximisation (EUM) framework and tested for sensitivity to the overweighting of small probabilities, as characterised by Cumulative Prospect Theory (CPT). A majority of participants displayed concave (risk-averse) utility curves and showed stronger aversion to inequality in societal life satisfaction outcomes than to personal risk. These preferences were unrelated to political alignment, suggesting a shared normative stance on fairness in well-being that cuts across ideological boundaries. The results challenge use of average life satisfaction as a policy metric and support the development of nonlinear utility-based alternatives that more accurately reflect collective human values. Implications for public policy and well-being measurement are discussed. |
| Keywords: | Subjective well-being; Experimental method; Inequality aversion; Expected utility; Prospect theory; Social welfare; Fairness trade-offs |
| JEL: | C91 D63 D81 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:mub:wpaper:2026-04 |
| By: | Evan M. Calford |
| Abstract: | This paper introduces ambiguity-dominance as a novel equilibrium selection procedure that, in 2x2 games, unifies risk-dominance and payoffdominance as special cases. Ambiguity-dominance provides an intuitive answer to the question "Which equilibrium is most robust to ambiguous beliefs about the behavior of other players?" and is defined for all finite normal form games. Ambiguity-dominance is parametrized by players' ambiguity preference and, using data from three recent experiments we find, on aggregate, ambiguity loving coupled with substantial subject-level heterogeneity. |
| Keywords: | Equilibrium selection, ambiguity aversion |
| JEL: | C70 D81 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:acb:cbeeco:2025-707 |
| By: | Dongwoo Kim; Young Jun Lee |
| Abstract: | This paper develops a set of empirically tractable and flexible sieve estimators for semi nonparametric multidimensional matching models with transferable utility, focusing on worker-job matching. We generalize the parametric quadratic-Gaussian framework employed by Bojilov and Galichon (2016) and Lindenlaub (2017), which relies on joint normality of observed characteristics. We allow unrestricted distributions of characteristics and show identification of the production technology and the equilibrium wage and matching functions using optimal transport theory. Given identification, we propose efficient, consistent, and asymptotically normal sieve estimators. We revisit Lindenlaub’s empirical application and show that, between 1990 and 2010, the U.S. economy experienced much larger technological progress favoring cognitive abilities than the original findings suggest. Furthermore, our flexible model specifications provide a significantly better fit for patterns in the evolution of wage inequality. |
| Date: | 2026–05–27 |
| URL: | https://d.repec.org/n?u=RePEc:azt:cemmap:09/26 |
| By: | Andrew Chen; Francisco Palomino |
| Abstract: | We provide a theorem on the role of risk and risk attitudes in macroeconomic models that clarifies and extends the Tallarini (2000) separation result. Under (1) separation of intertemporal and risk preferences, (2) separation of drivers of first and higher moments in the model primitives, and (3) approximate linearity of constraints, risk aversion and time-varying risk are irrelevant for the elasticity of any endogenous variable with respect to state variables that don't drive variation in higher moments. We discuss how models generate a more prominent role for risk by ``breaking'' or ``adapting'' to the assumptions in the theorem. |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2606.05554 |
| By: | Eduard Gracia (Universitat de Barcelona) |
| Abstract: | Under very general conditions, the best predictor of any random variable’s observed time series is not its mean but its median. Hence, if we aim to model a variable with a skewed (a.k.a. asymmetric) probability distribution, so mean and median diverge, it is the model’s predicted median path that must be compared to that variable’s observed time series. Thus e.g. rational economic agents base their decisions on their target variables’ expected (a.k.a. mean) paths, which must as a result follow certain rules (mainly no arbitrage); but, if those variables are skewedly distributed, irrational-looking observations may not reflect irrationality, for the median is not subject to the rules rationality imposes on the mean. Yet economic models rarely pose this hypothesis and, when they do, their skewness assumptions often present major theoretical and/or empirical drawbacks. This paper proposes instead to assume normally distributed (hence symmetric) random perturbations and then rely on economics’ standard nonlinear assumptions (e.g. diminishing returns, decreasing marginal utility, etc.) to skew relevant variables’ distributions endogenously. To put this analytical framework to work, we build three new, rational expectations, frictionless markets’ macroeconomic models (two for market bubbles and one for Tobin’s q) and prove their predictions fit the stylized facts better, and more comprehensively, than the standard models’ while relying on more general, parsimonious standard assumptions. |
| Keywords: | Bubbles, cycles, rationality, macroeconomics |
| JEL: | C53 E32 E44 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ewp:wpaper:497web |
| By: | Seungjin Han; Siyang Xiong |
| Abstract: | We study contracting with imperfect commitment and identify minimal canonical contract spaces that fully characterize equilibrium outcomes under general preferences. Different from previous solutions, our framework accommodates infinite agent type spaces (unlike Bester and Strausz (2001)), non-quasi-linear utilities (unlike Skreta (2006)), and settings where the principal lacks the commitment power typically assumed in information design (unlike Doval and Skreta (2021)). Moreover, our results apply to both single- and multi-principal environments, providing a unified and tractable approach to contracting under limited commitment. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.19884 |