|
on Utility Models and Prospect Theory |
| By: | Benedikt Koch; Kosuke Imai; Tomasz Strzalecki |
| Abstract: | Counterfactual utilities evaluate decisions not only by the realized outcome under a given decision, but also by the counterfactual outcomes that would arise under alternative decisions. By generalizing standard utility frameworks, they allow decision-makers to encode asymmetric criteria, such as avoiding harm and anticipating regret. Recent work, however, has raised fundamental concerns about the coherence and transitivity of counterfactual utilities. We address these concerns by extending the von Neumann-Morgenstern (vNM) framework to preferences defined on the extended space of all potential outcomes rather than realized outcomes alone. We show that expected counterfactual utility satisfies the vNM axioms on this extended domain, thereby admitting a coherent preference representation. We further examine how counterfactual preferences map onto the realized outcome space through menu-dependent and context-dependent projections. This axiomatic framework reconciles apparent inconsistencies highlighted by the Russian roulette example in the statistics literature and resolves the well-known Allais paradox from behavioral economics. We also derive an additional axiom required to reduce counterfactual utilities to standard utilities on the same potential outcome space, and establish an axiomatic foundation for additive counterfactual utilities, which satisfy a necessary and sufficient condition for point identification. Finally, we show that our results hold regardless of whether individual potential outcomes are deterministic or stochastic. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.05521 |
| By: | Pascal Toquebeuf (GAEL - Laboratoire d'Economie Appliquée de Grenoble - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - UGA - Université Grenoble Alpes - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - UGA - Université Grenoble Alpes) |
| Abstract: | This paper investigates the compatibility of the properties of rectangularity and central symmetry for the set of probabilities in the alpha-Maxmin Expected Utility model. In this framework, rectangularity is the condition that ensures dynamic consistency. We show that when a set of probabilities is centrally symmetric, this requirement forces a strict trade-off: ambiguity, defined as non-singleton beliefs, must vanish either for the marginal probabilities over partitions or for the conditional probabilities given partition elements at each stage of the filtration. |
| Keywords: | Ambiguity, Max-min expected utility, Rectangularity, Central symmetry, Dynamic consistency |
| Date: | 2026–04–25 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05602622 |
| By: | Samuele Centorrino; Fr\'ed\'erique F\`eve; Jean-Pierre Florens |
| Abstract: | We develop a nonparametric approach to identify and estimate consumer preferences and unobserved heterogeneity under nonlinear price schedules. Leveraging variation across multiple price schedules, we show that both the utility function and the distribution of preference types can be nonparametrically identified. The quantile function of unobserved types becomes solution of a functional equation, and we derive conditions ensuring identification. We propose an iterative approach for estimation, in which the regularization bias decays exponentially in the number of iterations while the variance grows only polynomially, yielding a near-parametric convergence rate. We propose a valid bootstrap procedure for finite-sample inference and extend the framework to accommodate potential endogeneity of prices and additional observed heterogeneity. Monte Carlo simulations and an empirical application to data from a European mail carrier demonstrate how we can recover the utility functions and preference distributions in finite samples. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.25507 |
| By: | Mikhail Perepelitsa |
| Abstract: | This paper introduces a heterogeneous macroeconomic model of a Proof-of-Stake (PoS) network to analyze the long-term centralizing effects of external traditional finance (TradFi) yields. We model a continuum of rational actors divided into two distinct classes: investors, who optimize portfolios between staking and external variance-dominated investments, and consumers, who balance staking yields against the transactional utility of holding liquid assets. By employing a quasi-linear utility function to model consumer behavior, we derive a cubic polynomial that strictly defines the unique macroeconomic equilibrium of the coupled network. The model demonstrates that, at scale, external macroeconomic factors force the complete institutional capture of the PoS consensus layer. Because investors have access to external risk premiums, their wealth compounds exponentially, leading to massive capital inflows that crush the protocol's internal staking yield to effectively zero. We show that as the yield is crushed, consumer wealth becomes strictly upper-bounded. Ultimately, consumers are forced to cease staking entirely and hold all remaining wealth in liquid form to satisfy their transactional constraints. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.26076 |
| By: | Tanaka, Tetsuji; Guo, Jin; Sun, Laixiang; Song, Xiao-Peng |
| Abstract: | Climate-induced yield variability and a global soybean import-to-production ratio exceeding 40% have rendered international food markets increasingly vulnerable to regional supply shocks. Here we evaluate a "global hedging mechanism" that leverages remote sensing (RS) technology to exploit the seasonal production asymmetries between the Northern and Southern Hemispheres. By integrating early-season forecasts from the Southern Hemisphere into the planting decisions of Northern Hemisphere farmers, this information-based coordination allows for ex ante production adjustments that stabilize global supply and prices. Using counterfactual simulations and risk-premium measures derived from expected utility and prospect theories, we demonstrate that the utilization of RS information reduces import price volatility across all eight sampled countries, with significant declines of 10.0% in Hungary and 9.3% in Iran. While conventional expected utility models estimate global annual welfare benefits up to USD 954 million , our behavioral analysis accounting for loss aversion through prospect theory reveals that benefits could reach approximately USD 15.5 billion. These results underscore the disproportionate impact of price spikes on welfare in vulnerable, import dependent economies. Our findings suggest that RS-based forecasting functions as a global public good, providing a cost-effective, market-compatible safety net. Investing in international RS infrastructure and integrating transparent information into food policy are essential steps for enhancing the resilience of the global agricultural value chain against future climatic crises. |
| Keywords: | International Relations/Trade |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ags:aes026:397872 |
| By: | Ian Fligler |
| Abstract: | In strategic games such as the prisoner's dilemma, allowing players to make binding offers of utility transfers before play has been shown to alter incentives and potentially support cooperative outcomes. These preplay exchange mechanisms reshape payoffs by transferring utility while being contingent on actions; however, they typically require side payments that can reduce individual benefits relative to joint cooperation. In this paper, we extend the analysis to a finite $n$-player prisoner's dilemma with ordered strategy sets, defined such that any restriction of strategies by any subset of players still yields a prisoner's dilemma. To achieve a robust cooperative outcome that resists group deviations, we introduce a novel class of mechanisms: $\textit{losing contracts}$. Unlike transfer-based preplay mechanisms, losing contracts require players to irrevocably reduce their own utility if they defect, thereby aligning individual incentives with cooperation without inter-player payments. With appropriately chosen loss amounts, losing contracts induce joint cooperation as the unique strong Nash equilibrium in the modified game and in every restricted game within it, ensuring that cooperative incentives persist even under possible external constraints on strategy sets. We show that our contracts can be constructively defined, reducing the preplay stage to a simple and binary decision for each player: whether to sign the contract or not. Furthermore, if the losing contract is only executed when all players sign, signing is a strictly dominant strategy for all. Finally, we extend these results to certain public goods games. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.22563 |
| By: | Zhiming Feng |
| Abstract: | This paper develops a decomposition methodology for common agency games in which each principal's payoff depends on her own outcome and the agent's type, but not on rivals' outcomes. The key step reduces each principal's best-response problem to a standard screening problem defined over the agent's indirect utility -- the upper envelope of her payoff over rivals' offerings. Individually best-responding mechanisms then assemble into a pure-menu perfect Bayesian equilibrium when a compatibility condition (utility-preserving recombination) ensures aligned tie-breaking across principals. Under a non-indifference condition, the decomposition recovers all equilibria except those sustained by menu items that no type of the agent actually selects but which nevertheless discipline the rival's screening problem. When principals' payoffs depend on the full allocation profile, the decomposition adapts only under substantive regularity conditions on the agent's off-path choice behavior, one of which coincides with Luce's choice axiom. I apply the methodology to two settings. In a quadratic-loss delegation model, equilibria feature one principal offering a finite menu of discrete ``regimes'' while the other receives piecewise full delegation within each regime. In a competitive bundling duopoly under intrinsic common agency, the decomposition yields equilibria exhibiting market splitting, in which firms specialize in complementary bundles, and asymmetric equilibria with a take-it-or-leave-it base contract paired with a nested or tree menu of upgrades. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.23971 |
| By: | Steeve Mongrain; Federico Revelli; Tanguy van Ypersele; Roberto Zotti |
| Abstract: | This paper models theoretically and tests empirically the hypothesis that the decision about the location of a public bad within a multi-tiered structure of government (a facility providing benefits throughout the federation but inflicting damage to the region hosting it) can be driven by strategic electoral considerations exploiting the heterogeneous migration responses to the location of the public bad by voters of different ideologies - a sort of mobility-based gerrymandering. As long as the average utility loss from living close to the public bad is larger for progressives than it is for conservatives, conservative and progressive central governments will pursue opposite strategies. The former locate the public bad in an electorally tight region to induce progressive voters to exit and gain the region for the conservative party, while the latter attempt to spread progressive voters out of safe and into electorally tight regions. An application to waste treatment plant locations across Italian municipalities returns evidence in support of the model's main hypotheses. |
| Keywords: | gerrymandering, sorting, multi-tier structure, local elections |
| JEL: | D72 R23 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12625 |
| By: | Stefan Hubner |
| Abstract: | This paper develops a method to use singles' data in a non-parametric revealed preference setting of collective household choice. We use it to test the controversial assumption of preference stability between singles and couples, without data on intra-household allocation or marital transitions. We show that, under the preference-stability hypothesis, consumption choices from an endogenously matched population admit a conditional random-utility representation over counterfactual pairings of couples and singles. Preference stability is testable as a feasibility restriction on the observed marginal choice distributions. We reject the hypothesis using consumption data from the Dutch LISS, the Russian RLMS, and the Spanish ECPF panels. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.04771 |
| By: | Chris Chambers; Yusufcan Masatolioglu; Paulo Natenzon; Collin Raymond |
| Abstract: | We provide a theoretical framework to understand how widely used measures of choice difficulty relate. In a binary-option Bayesian expected-utility framework, we show that three measures of difficulty, (i) understanding (ex-ante value), (ii) choice randomness, and (iii) confidence that the chosen option is ex post correct, are, in general, unrelated, and that this result extends to other potential measures like attenuation. We provide intuitive sufficient conditions which align the orders, using both restrictions on Blackwell experiments that capture well known classes (such as logit) and restrictions on payoffs and demonstrate that in psychophysical tasks that pay only for correctness, confidence coincides with understanding. We show willingness-to-accept to switch, when measured in utils, is equivalent to understanding. Our results suggest caution in interpreting measures of choice difficulty as well as the degree of portability between economics and psychophysics experiments |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.26761 |