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on Utility Models and Prospect Theory |
| By: | van Bruggen, Paul (Tilburg University, School of Economics and Management); Laeven, Roger J. A.; van de Kuilen, Gijs (Tilburg University, School of Economics and Management) |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:tiu:tiutis:c566934e-eb60-4b4b-a972-4a61e5e15cac |
| By: | Vassili N. Kolokoltsov; Egor M. Dranov; Denis E. Piskun |
| Abstract: | The Nobel-price winning Mirrlees' theory of optimal taxation inspired a long sequence of research on its refinement and enhancement. However, an issue of concern has been always the fact that, as was shown in many publications, the optimal schedule in Mirrlees' paradigm of maximising the total utility (constructed from individually optimised individual ones) usually did not lead to progressive taxation (contradicting the ethically supported practice in developed economies), and often even assigned minimal tax rates to the higher paid strata of society. The first objective of this paper is to support this conclusion by proving a theorem on optimal tax schedule in (practically most exploited) piecewise-linear environment under a simplest natural utility function. The second objective is to suggest a new paradigm for optimal taxation, where instead of just total average utility maximization one introduces a standard deviation of utility as a second parameter (in some analogy with Marcowitz portfolio optimization). We show that this approach leads to transparent and easy interpreted optimality criteria for income tax. |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2408.14476 |
| By: | Holger Gerhardt (University of Bonn); Rafael Suchy (University of Oxford, UK) |
| Abstract: | We propose an easy-to-use method for estimating preference parameters experimentally: choices from strictly concave budget restrictions (SCBRs). SCBRs generalize the popular method of analyzing choices from linear budget restrictions (LBRs). SCBRs promise (i) to improve the informational content of individual choices by reducing the number of corner allocations and (ii) to increase the range of identifiable behavioral types. Two online studies on risk and time preferences confirm the benefits of SCBRs vis-à-vis LBRs: (i) They reduce corner allocations drastically and make more participants estimable individually. (ii) They elicit a richer distribution of preference parameters, specifically, distinguishing linear from convex utility. |
| Keywords: | Preference elicitation, time preferences, risk preferences, budget constraints |
| JEL: | C91 D01 D81 D90 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:ajk:ajkdps:336 |
| By: | Dirk Krueger (University of Pennsylvania, CEPR and NBER); Fulin Li (Texas A&M University); Harald Uhlig (University of Chicago, CEPR and NBER) |
| Abstract: | This paper characterizes the transition dynamics of a continuous-time neoclassical production economy with capital accumulation in which households face idiosyncratic income risk and cannot commit to repay their debt. Therefore, even though a full set of contingent claims that pay out conditional on the realization of idiosyncratic shocks is available, the equilibrium features imperfect insurance and a non-degenerate crosssectional consumption distribution. When household labor productivity takes two values, one of which is zero, and the utility function is logarithmic, we characterize the entire transition dynamics induced by unexpected technology shocks, including the evolution of the consumption distribution, in closed form. Thus, the model constitutes an analytically tractable alternative to the standard incomplete markets general equilibrium Aiyagari (1994) model by retaining its physical environment, but replacing the incomplete asset markets structure with one in which limits to consumption insurance emerge endogenously due to limited commitment. |
| Keywords: | Idiosyncratic Risk, Limited Commitment, Transition Path, MIT Shock |
| JEL: | E21 D11 D91 G22 |
| Date: | 2024–08–15 |
| URL: | https://d.repec.org/n?u=RePEc:pen:papers:24-020 |
| By: | Costa-Font, Joan (London School of Economics); Cowell, Frank A. (London School of Economics) |
| Abstract: | An individual's inequality aversion (IA) is a central preference parameter that captures the welfare sacrifice from exposure to inequality. However, it is far from trivial how to best elicit IA estimates. Also, little is known about the behavioural determinants of IA and how they differ across domains such as income and health. Using representative surveys from England, this paper elicits comparable estimates of IA in the health and income domains using two alternative elicitation techniques: a direct trade-off and an indirect "imaginary-grandchild" approach that results from the choices between hypothetical lotteries. We make three distinct contributions to the literature. First, we show that IA systematically differs between income and health domains. Average estimates are around 0.8 for income IA and range from 0.8 to 1.5 for health IA. Second, we find that risk aversion and locus of control are central determinants of IA in both income and health domains. Finally, we present evidence suggesting that the distribution and comparison of IA vary depending on the elicitation method employed. |
| Keywords: | inequality aversion, income inequality aversion, health inequality aversion, imaginary grandchild, inequality and efficiency trade-offs, risk attitudes, locus of control |
| JEL: | H1 I18 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17188 |
| By: | Reema Deori; Ankur A. Kulkarni |
| Abstract: | A persuasion policy successfully persuades an agent to pick a particular action only if the information is designed in a manner that convinces the agent that it is in their best interest to pick that action. Thus, it is natural to ask, what makes the agent trust the persuader's suggestion? We study a Bayesian persuasion interaction between a sender and a receiver where the sender has access to private information and the receiver attempts to recover this information from messages sent by the sender. The sender crafts these messages in an attempt to maximize its utility which depends on the source symbol and the symbol recovered by the receiver. Our goal is to characterize the \textit{Stackelberg game value}, and the amount of true information revealed by the sender during persuasion. We find that the SGV is given by the optimal value of a \textit{linear program} on probability distributions constrained by certain \textit{trust constraints}. These constraints encode that any signal in a persuasion strategy must contain more truth than untruth and thus impose a fundamental bound on the extent of obfuscation a sender can perform. We define \textit{informativeness} of the sender as the minimum expected number of symbols truthfully revealed by the sender in any accumulation point of a sequence of $\varepsilon$-equilibrium persuasion strategies, and show that it is given by another linear program. Informativeness is a fundamental bound on the amount of information the sender must reveal to persuade a receiver. Closed form expressions for the SGV and the informativeness are presented for structured utility functions. This work generalizes our previous work where the sender and the receiver were constrained to play only deterministic strategies and a similar notion of informativeness was characterized. Comparisons between the previous and current notions are discussed. |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2408.13822 |
| By: | Dräger, Lena; Floto, Maximilian; Schröder, Marina |
| Abstract: | We provide evidence for an expectation gap, where risk-averse as well as impatient households and experts provide significantly higher prior inflation forecasts. Using a survey randomized control trial (RCT), we can show that information about inflation forecasts closes this expectations gap. The group, whose prior expectations was farthest from the treatment information, tends to adjust posterior expectations more strongly. However, we find no such effect with respect to forecasts for energy prices, which are less informative. Our results suggest that the expectation gap seems to be partially due to differences in information seeking between different types of individuals. |
| Keywords: | Inflation expectations, patience, risk preference, households, experts, survey experiment, randomized control trial (RCT) |
| JEL: | E52 E31 D84 D90 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:han:dpaper:dp-726 |
| By: | Dirk Krueger (University of Pennsylvania, CEPR and NBER); Harald Uhlig (University of Chicago, CEPR and NBER) |
| Abstract: | This paper characterizes the stationary equilibrium of a continuous-time neoclassical production economy with capital accumulation in which agents can insure against idiosyncratic income risk by trading state-contingent assets, subject to limited commitment constraints that rule out short-selling. For an N-state Poisson labor productivity process we characterize the household consumption-asset allocation, stationary asset distribution and aggregate capital supply. When production is Cobb-Douglas, productivity takes two values, of which one is zero, and agents have log-utility, the equilibrium interest rate, capital stock and consumption distribution is given in closed form. We therefore provide a tractable alternative to the Aiyagari incomplete markets model. |
| Keywords: | Idiosyncratic Risk, Limited Commitment, Stationary Equilibrium |
| JEL: | E21 D11 D91 G22 |
| Date: | 2024–08–09 |
| URL: | https://d.repec.org/n?u=RePEc:pen:papers:24-021 |