nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2024‒04‒08
nine papers chosen by
Alexander Harin, Modern University for the Humanities

  1. Income-well-being gradient in sickness and health By Petri Böckerman; Ohto Kanninen; Ilpo Suoniemi
  2. Using a price-dependent utility function to construct price indices By Uliyanov, Igor
  3. Semistatic robust utility indifference valuation and robust integral functionals By Keita Owari
  4. A note on the relation between the Shapley value and the core of 3-player transferable utility games By Dehez, Pierre; Pacini, Pier Mario
  5. Shining with the stars: Competition, screening, and concern for coworkers’ quality By Francesca Barigozzi; Helmuth Cremer
  6. Financial Windfalls, Portfolio Allocations, and Risk Preferences By Briggs, Joseph; Cesarini, David; Chanwook Lee, Sean; Lindqvist, Erik; Östling, Robert
  7. Optimal Security Design for Risk-Averse Investors By Alex Gershkov; Benny Moldovanu; Philipp Strack; Mengxi Zhang
  8. The Cost of Risk-Aversion In Inventory Management : An (s, S) Case Study By Angun, Ebru; Kleijnen, Jack
  9. Dynamic Contracting with Many Agents By Bruno Biais; Hans Gersbach; Jean-Charles Rochet; Ernst-Ludwig von Thadden; Stéphane Villeneuve

  1. By: Petri Böckerman; Ohto Kanninen; Ilpo Suoniemi
    Abstract: We propose a method of studying the value of insurance. For this purpose, we analyze well-being of the same individuals, comparing sick and healthy years in German panel survey data on life satisfaction. To impose structure on the income–well-being gradient, we fit a flexible utility function to the data, focusing on the differences in marginal utility in the sick and the healthy state, by allowing for a “fixed cost of sickness”. We find that marginal utility of income is higher in the sick state. We use our estimates to gauge the value of sickness insurance for Baily-Chetty type optimal policy calculations. We also show that the income–well-being gradient has steepened over time in Germany and we use the fitted model to characterize this change.
    Keywords: life satisfaction, state dependence, risk aversion, social insurance, optimal benefits, sickness absence
    JEL: C13 H55 I13
  2. By: Uliyanov, Igor
    Abstract: The purpose of this paper is to incorporate a price-dependent utility function into the theory of price indices. The results presented in the paper provide justification for incorporating relative prices into a consumption aggregate for solving the household’s optimization problem. Using a proposed CES aggregator, a simple model to approximate the conventional geometric price indices has been developed. The model provides the channels of convergence between the axiomatic, stochastic and economic approaches to index number theory. Numerical results based on data published by the Office for National Statistics are presented to confirm the validity of the model
    Keywords: Consumption aggregator with price-dependent weights; Price index with price-dependent preferences
    JEL: C43 E12 E31
    Date: 2024–01–17
  3. By: Keita Owari
    Abstract: We consider a discrete-time robust utility maximisation with semistatic strategies, and the associated indifference prices of exotic options. For this purpose, we introduce a robust form of convex integral functionals on the space of bounded continuous functions on a Polish space, and establish some key regularity and representation results, in the spirit of the classical Rockafellar theorem, in terms of the duality formed with the space of Borel measures. These results (together with the standard Fenchel duality and minimax theorems) yield a duality for the robust utility maximisation problem as well as a representation of associated indifference prices, where the presence of static positions in the primal problem appears in the dual problem as a marginal constraint on the martingale measures. Consequently, the resulting indifference prices are consistent with the observed prices of vanilla options.
    Date: 2024–02
  4. By: Dehez, Pierre (Université catholique de Louvain, LIDAM/CORE, Belgium); Pacini, Pier Mario
    Abstract: We reconsider the necessary and sufficient conditions under which the Shapley value of a 3-player superadditive game belongs to the core. We then compute the proportion of games whose Shapley value belongs to the core within the set of balanced superadditive games.
    Keywords: Core ; Shapley value
    JEL: C71
    Date: 2024–01–18
  5. By: Francesca Barigozzi (UNIBO - Alma Mater Studiorum Università di Bologna = University of Bologna); Helmuth Cremer (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: We study how workers' concern for coworkers' ability (CfCA) affects competition in the labor market. Two firms offer nonlinear contracts to a unit mass of prospective workers. Firms may differ in their marginal productivity, while workers are heterogeneous in their ability (high or low) and their taste for being employed by any of the two firms. Workers receive a utility premium when employed by the firm hiring most high-ability workers and suffer a utility loss if hired by its competitor. These premiums/losses are endogenously determined. We characterize contracts and workers' sorting into the two firms under complete and private information on workers' ability. We show that CfCA is detrimental to firms, but it benefits high-ability workers, especially when their ability is observable. In addition, CfCA exacerbates the existing distortion in high-ability workers' sorting into the two firms.
    Keywords: Concern for coworkers’ quality, Competition, Screening, Sorting
    Date: 2024–03
  6. By: Briggs, Joseph (Goldman Sachs); Cesarini, David (New York University); Chanwook Lee, Sean (Harvard University); Lindqvist, Erik (Swedish Institute for Social Research, Stockholm University); Östling, Robert (Stockholm School of Economics)
    Abstract: We investigate the impact of financial windfalls on household portfolio choices and risk exposure. Exploiting the randomized assignment of lottery prizes in three Swedish lotteries, we find a windfall gain of $100K leads to a 5-percentage-point de- crease in the risky share of household portfolios. We show theoretically that negative wealth effects are consistent with both constant and decreasing relative risk aversion and analyze how our empirical estimates help distinguish between competing models of portfolio choice. We further show our results are quantitatively aligned with the predictions of a calibrated dynamic portfolio choice model with nontradable human capital and consumption habits.
    Keywords: risk preferences; portfolio choice
    JEL: G11 G50
    Date: 2023–11–21
  7. By: Alex Gershkov; Benny Moldovanu; Philipp Strack; Mengxi Zhang
    Abstract: We use the tools of mechanism design, combined with the theory of risk measures, to analyze a model where a cash constrained owner of an asset with stochastic returns raises capital from a population of investors that differ in their risk aversion and budget constraints. The distribution of the asset's cash flow is assumed here to be common-knowledge: no agent has private information about it. The issuer partitions and sells the asset's realized cash flow into several asset-backed securities, one for each type of investor. The optimal partition conforms to the commonly observed practice of tranching (e.g., senior debt, junior debt and equity) where senior claims are paid before the subordinate ones. The holders of more senior/junior tranches are determined by the relative risk appetites of the different types of investors and of the issuer, with the more risk averse agents holding the more senior tranches. Tranching endogenously arises here in an optimal mechanism because of simple economic forces: the differences in risk appetites among agents, and in the budget constraints they face.
    Keywords: security design, tranching
    JEL: F0 D82
    Date: 2023–08
  8. By: Angun, Ebru; Kleijnen, Jack (Tilburg University, School of Economics and Management)
    Date: 2024
  9. By: Bruno Biais; Hans Gersbach; Jean-Charles Rochet; Ernst-Ludwig von Thadden; Stéphane Villeneuve
    Abstract: We analyze dynamic capital allocation and risk sharing between a principal and many agents, who privately observe their output. The state variables of the mechanism design problem are aggregate capital and the distribution of continuation utilities across agents. This gives rise to a Bellman equation in an infinite dimensional space, which we solve with mean-field techniques. We fully characterize the optimal mechanism and show that the level of risk agents must be exposed to for incentive reasons is decreasing in their initial outside utility. We extend classical welfare theorems by showing that any incentive-constrained optimal allocation can be implemented as an equilibrium allocation, with appropriate money issuance and wealth taxation by the principal.
    Keywords: Incomplete Financial Markets, Debt, Interest, Growth, Ponzi Games, Heterogeneous Agents, Political Economy
    JEL: E44 E62
    Date: 2024–03

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