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on Utility Models and Prospect Theory |
| By: | Guilio Fella; Martin B. Holm; Thomas M. Pugh |
| Abstract: | We use administrative data for Norway to estimate an incomplete-market life-cycle model of retired singles and couples with a bequest motive, health-dependent utility, and uncertain longevity and health. We allow the parameters of the bequest utility to differ between households with and without offspring. Our estimates imply a very strong utility of residual wealth (bequest motive), in line with the estimates by Lockwood (2018). The bequest motive accounts for approximately three-quarters of aggregate wealth at age 85. More surprisingly, we estimate similar utility of residual wealth for households with and without offspring. We interpret this as, prima facie, evidence that the utility of residual wealth represents forces beyond an altruistic bequest motive. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:bbq:wpaper:0008 |
| By: | Marco Battaglini; Thomas R. Palfrey |
| Abstract: | We study the volunteer’s dilemma in environments with heterogeneous preferences and private information. We characterize the efficiency properties of equilibrium, which is a departure from all the previous literature that focuses only on the probability of group success. While the probability of success may be non-monotonic in the size of the group, we show that per-capita welfare is always increasing for all types, strictly for sufficiently high types. As group size increases, the expected utility of every type converges to the expected utility of the type with the lowest possible cost, which is the same expected utility when there is no free rider problem, i.e., when there is only a single player in the game and that player has the lowest possible cost. |
| JEL: | C78 D71 D72 H41 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32999 |
| By: | John Armstrong; Cristin Buescu; James Dalby |
| Abstract: | We study the optimal investment problem for a homogeneous collective of $n$ individuals investing in a Black-Scholes model subject to longevity risk with Epstein--Zin preferences. %and with preferences given by power utility. We compute analytic formulae for the optimal investment strategy, consumption is in discrete-time and there is no systematic longevity risk. We develop a stylised model of systematic longevity risk in continuous time which allows us to also obtain an analytic solution to the optimal investment problem in this case. We numerically solve the same problem using a continuous-time version of the Cairns--Blake--Dowd model. We apply our results to estimate the potential benefits of pooling longevity risk over purchasing an insurance product such as an annuity, and to estimate the benefits of optimal longevity risk pooling in a small heterogeneous fund. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2409.15325 |
| By: | Andersson, Ola (Uppsala University, Department of Economics); Castillo, Geoffrey (Nottingham Trent University); Wengström, Erik (Department of Economics, Lund University) |
| Abstract: | We propose the Virtual Bingo Blower (VBB) as a way to generate credible risk and ambiguity in computerized experiments. Using a physics engine—a computer simulation of a physical system—the VBB simulates a conventional bingo blower. Different aspects of the VBB, such as the number of balls, their color, and their speed, can be easily modified. In an online experiment, we measure ambiguity attitudes and vary the source of ambiguity, using either the VBB or natural events. We find that the VBB and natural events result in a similar degree of ambiguity aversion. Further, we find that, by manipulating the number of balls, the VBB can be used to manipulate the perceived level of ambiguity. |
| Keywords: | ambiguity; risk; bingo blower; online experiment; experimental tools; randomization |
| JEL: | C91 D81 |
| Date: | 2024–09–30 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:lunewp:2024_008 |
| By: | Klaus M. Schmidt; Jonas von Wangenheim |
| Abstract: | Reference-dependent preferences can explain several puzzling observations about organizational change. We introduce a dynamic model in which a loss-neutral firm bargains with loss-averse workers over organizational change and wages. We show that change is often stagnant or slow for long periods followed by a sudden boost in productivity during a crisis. Moreover, it accounts for the fact that different firms in the same industry often have significant productivity differences. The model also demonstrates the importance of expectation management even if all parties have rational expectations. Social preferences explain why it may be optimal to divide a firm into separate entities. |
| Keywords: | Organizational Change, Productivity, Reference Points, Loss Aversion, Social Preferences |
| JEL: | D23 D91 L2 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_599 |
| By: | Dasgupta, Indraneel (Indian Statistical Institute) |
| Abstract: | We model a rent-seeking contest among two 'identity ideologues', differentially located along a uni-dimensional identity continuum, and a 'mercenary', who can choose any location in-between. The contest jointly awards an identity-relevant good ('religion') and an identity-irrelevant good ('money'). The mercenary values only money, the ideologues value both money and religion. The ideologues are worse off, at an increasing rate, when the winner is located farther away. We show that, under reasonable restrictions, the following hold. A decline in the mercenary's cost of contest effort reduces conflict. Both ideologues lose in success probability, but gain in expected utility. Elimination of the mercenary increases conflict and makes the ideologues more successful yet worse off. Our results rationalize 'imperial peace' – long periods of stability and social peace in multi-ethnic empires, and explain why the weakening and breakdown of such empires is often associated with a sharp rise in ethnic violence within their territories. |
| Keywords: | rent-seeking contest, identitarian distance, ethnic conflict, imperial peace, decolonization |
| JEL: | D72 D74 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17312 |
| By: | Riku Watanabe (Graduate School of Economics, Osaka University) |
| Abstract: | This study examines how corporate social responsibility (CSR) practices by oligopolistic firms impact pollution levels in a steady state. I develop a dynamic game model for polluting firms that adopt CSR. The analysis reveals that a firm’s CSR awareness drives its production strategy to align with the socially optimal level in both open-loop Nash equilibrium and Markov perfect Nash equilibrium. Achieving this social optimum is possible if firms are fully committed to CSR. The study explores two scenarios: excess pollution or underproduction, which depend on the pollutant’s impact on utility. Notably, when the pollutant’s damage to utility is significant, even a modest commitment to CSR can effectively reduce excessive pollution. These findings offer valuable insights for government policy, suggesting that stringent environmental regulations might be less necessary if firms are attentive to CSR. |
| Keywords: | Corporate social responsibility; Pollution; Oligopoly; Differential games |
| JEL: | H41 L13 Q20 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:osk:wpaper:2410 |
| By: | Alexandre Truc (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - CNRS - Centre National de la Recherche Scientifique - UniCA - Université Côte d'Azur); Dorian Jullien (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, UP1 UFR02 - Université Paris 1 Panthéon-Sorbonne - École d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne) |
| Abstract: | This paper studies the controversy on Fehr and Schmidt's model of inequity aversion. It borrows insights from disciplines such as philosophy and the sociology of science that have specialized in studying scientific controversies. Our goal is to contribute to the historical and methodological literature on behavioral economics, which happens to have neglected behavioral economists' research on social preferences. Our analysis of the controversy reveals some new insights about the relation of behavioral economics with other sub-fields in economics, as well as with other disciplines. |
| Keywords: | Controversies, Behavioral Economics, Rhetoric, Social Preferences, Norms, Inequity Aversion |
| Date: | 2023 |
| URL: | https://d.repec.org/n?u=RePEc:hal:cesptp:hal-04719263 |
| By: | E. Ruben van Beesten |
| Abstract: | I propose a functional on the space of spectral risk measures that quantifies their ``degree of risk aversion''. This quantification formalizes the idea that some risk measures are ``more risk-averse'' than others. I construct the functional using two axioms: a normalization on the space of CVaRs and a linearity axiom. I present two formulas for the functional and discuss several properties and interpretations. |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2408.15675 |
| By: | Ellis, Andrew; Freeman, David J. |
| Abstract: | Experiments suggest that people fail to take into account interdependencies between their choices—they do not broadly bracket. Researchers often instead assume people narrowly bracket, but existing designs do not test it. We design a novel experiment and revealed preference tests for how someone brackets their choices. In portfolio allocation under risk, social allocation, and induced-value shopping experiments, 40–43 percent of subjects are consistent with narrow bracketing, and 0–16 percent with broad bracketing. Adjusting for each model's predictive precision, 74 percent of subjects are best described by narrow bracketing, 13 percent by broad bracketing, and 6 percent by intermediate cases. |
| Keywords: | AAM requested |
| JEL: | D12 D81 D91 |
| Date: | 2024–09–20 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:125470 |
| By: | Bradley, Richard |
| Abstract: | Insurers draw on sophisticated models for the probability distributions over losses associated with catastrophic events that are required to price insurance policies. But prevailing pricing methods don’t factor in the ambiguity around model-based projections that derive from the relative paucity of data about extreme events. I argue however that most current theories of decision making under ambiguity only partially support a solution to the challenge that insurance decision makers face and propose an alternative approach that allows for decision making that is responsive to both the evidential situation of the insurance decision maker and their attitude to ambiguity. |
| Keywords: | ambiguity; insurance decision making; reinsurance; natural catastrophes; catastrophe modelling |
| JEL: | J1 |
| Date: | 2024–09–11 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:122508 |
| By: | Yuehao Bai; Shunzhuang Huang; Sarah Moon; Azeem Shaikh; Edward J. Vytlacil |
| Abstract: | In the context of a binary outcome, treatment, and instrument, Balke and Pearl (1993, 1997) establish that the monotonicity condition of Imbens and Angrist (1994) has no identifying power beyond instrument exogeneity for average potential outcomes and average treatment effects in the sense that adding it to instrument exogeneity does not decrease the identified sets for those parameters whenever those restrictions are consistent with the distribution of the observable data. This paper shows that this phenomenon holds in a broader setting with a multi-valued outcome, treatment, and instrument, under an extension of the monotonicity condition that we refer to as generalized monotonicity. We further show that this phenomenon holds for any restriction on treatment response that is stronger than generalized monotonicity provided that these stronger restrictions do not restrict potential outcomes. Importantly, many models of potential treatments previously considered in the literature imply generalized monotonicity, including the types of monotonicity restrictions considered by Kline and Walters (2016), Kirkeboen et al. (2016), and Heckman and Pinto (2018), and the restriction that treatment selection is determined by particular classes of additive random utility models. We show through a series of examples that restrictions on potential treatments can provide identifying power beyond instrument exogeneity for average potential outcomes and average treatment effects when the restrictions imply that the generalized monotonicity condition is violated. In this way, our results shed light on the types of restrictions required for help in identifying average potential outcomes and average treatment effects. |
| JEL: | C31 C35 C36 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32983 |
| By: | Andrea L. Eisfeldt; Bernard Herskovic; Shuo Liu |
| Abstract: | Intermediation capacity varies across dealers, and as a result, misallocation of credit risk reduces the risk-bearing capacity of the dealer sector and increases effective market-level risk aversion. When the efficient reallocation of credit risk within the dealer sector is impaired, interdealer price dispersion increases. Empirically, when interdealer price dispersion increases, bond prices decrease. Interdealer price dispersion explains a substantial portion of bond yield spread changes, the cross-section of bond returns, and the changes in the basis between bond spread and fair-value spreads. We conclude interdealer frictions reduce the risk-bearing capacity of intermediaries and are crucial for intermediary bond pricing. |
| JEL: | G12 G20 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32998 |