|
on Utility Models and Prospect Theory |
| By: | Zal\'an Gyenis; Mikl\'os R\'edei; Leszek Wro\'nski |
| Abstract: | In a recent paper \cite{Redei-Jing2026} the notion of conditional $p$-inaccessibility of a decision based on utility maximization was defined and examples of conditionally $p$-inaccessible decisions were given. The conditional inaccessibility of a decision based on maximizing utility calculated by a probability measure $p^*$ expresses that the decision cannot be obtained if the expectation values of the utility functions are calculated using the (Jeffrey) conditional probability measure obtained by conditioning $p$ on partial evidence about the probability $p^*$ that determines the decision. The paper \cite{Redei-Jing2026} conjectured that conditionally $p$-inaccessible decisions exist in some probability spaces having arbitrary large finite number of elementary events. In this paper we prove that for any $p$ in any finite probability space there exist an uncountable number of probability measures $p^*$ for each of which there exist an uncountable number of pairs of utility functions that represent conditionally $p$-inaccessible decisions. If $p^*$ is an objective probability determining objectively good decisions and $p$ is the subjective probability determining a rational decision of a decision making Agent, the result says that there is an enormous number of decision situations in which the Agent's subjective probability prohibits the Agent's informed rational decision to be objectively good. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.02865 |
| By: | Bo-Yu Yang; Michael Gastpar |
| Abstract: | We study the single-period portfolio selection problem under Constant Relative Risk-Aversion (CRRA) utility through the information-theoretic lens. Assuming only that the market payoff vector has finite support, we show that the Certainty-Equivalent (CE) growth rate under CRRA utility can be exactly decomposed into a portfolio-induced R\'enyi divergence term, a R\'enyi entropy term of the risk-tilted market law, and a log-partition term. In this setting, the R\'enyi order has a clear operational meaning: it exactly coincides with the investor's coefficient of relative risk aversion. We further show that CRRA portfolio selection is equivalent to a R\'enyi information-projection problem. Using a variational representation of R\'enyi divergence, we obtain a Blahut-Arimoto-style alternating optimization with a closed-form auxiliary update and a KL-type portfolio step. In the low risk-aversion regime, this method empirically requires fewer iterations than both direct CRRA utility optimization and Cover's method. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.03184 |
| By: | Alfred Galichon; Yu-Wei Hsieh; Antoine Jacquet |
| Abstract: | We propose an aggregate notion of non-transferable utility (NTU) stability for decentralized matching markets with fixed prices, where market clearing is achieved through one-sided money burning, which can be interpreted as waiting. Agents are grouped into observable types and are indifferent among individuals within type; equilibrium is defined at the type level and delivers equal indirect utility within each type. We introduce money burning into two types of NTU models: In a deterministic model, we relate our notion to classical Gale--Shapley stability and show how money burning decentralizes stable outcomes under aggregation. We then introduce separable random utility, obtaining an NTU counterpart to Choo and Siow (2006). We prove the existence and uniqueness of equilibrium and provide a stationary queueing interpretation. Finally, we develop a generalized deferred acceptance algorithm based on alternating constrained discrete-choice problems and prove its convergence to the unique equilibrium. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.07528 |
| By: | Jinhang Chai; Yaqi Duan; Jianqing Fan; Kaizheng Wang |
| Abstract: | We study contextual dynamic pricing under a semiparametric demand model in which the purchase probability is $1-F(p-m(\mathbf{x}))$, where $m(\mathbf{x})$ captures mean utility as a function of product features and buyer covariates, and $F$ is an unknown market-noise distribution. Existing methods either incur suboptimal regret or rely on restrictive structural assumptions. We propose a stagewise greedy pricing algorithm that iteratively refines the estimate of $F$ via local polynomial regression while pricing greedily with current estimates. By exploiting feature diversity, the algorithm reuses endogenous samples collected during exploitation for nonparametric estimation, avoiding costly global random exploration used in prior work. We establish a general regret bound that applies to any estimator $\hat m$ of the utility function, and derive explicit rates for linear, nonparametric additive, and sparse linear classes of $m$. For the linear class, our regret scales as $T^{\max\{1/2, \, 3/(2\beta+1)\}}$, where $\beta$ is the smoothness of $F$ and $T$ is the time horizon. This improves the best known rates for semiparametric contextual pricing and achieves the parametric $\sqrt{T}$ rate when $\beta \ge 5/2$. We further prove a matching lower bound, showing the optimality of our rate, and present numerical experiments that corroborate the theory and demonstrate the practical advantages of iterative refinement. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.04207 |
| By: | Sylwia Radomska (Institute of Economics, Polish Academy of Sciences (INE PAN); Group for Research in Applied Economics (GRAPE)); Marek Kapicka (Center for Economic Research and Graduate Education - Economics Institute (CERGE-EI)) |
| Abstract: | This paper studies optimal education finance in a dynastic Mirrlees economy in which parents derive direct utility from their children’s human capital alongside standard dynastic discounting. Education-specific parental altruism adds a non-productive utility return to investment: it raises parental utility independently of the output it generates. We show that this second channel alters the constrained-efficient human-capital wedge: sufficiently strong altruism reverses the wedge from negative to positive, the optimal education subsidy is decreasing in altruism, and stronger altruism shifts intergenerational transfers away from financial bequests toward education. Calibrated to the U.S. economy, the model implies that optimal education support is non-monotonic in income and decreasing in bequests: low-income dynasties receive support due to borrowing constraints, while middle-income families face the weakest case for intervention. Income-contingent loans raise schooling, output, and welfare, but widen educational dispersion. Income-dependent subsidies reduce educational inequality more directly, at the cost of labor-supply distortions and lower aggregate output. |
| Keywords: | optimal taxation; human capital, parental altruism, asymmetric information, dynastic Mirrlees model, income-contingent loans, education subsidies, intergenerational transfers, bequests. |
| JEL: | H21 H52 I22 J24 D82 D64 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:fme:wpaper:116 |
| By: | Max-Frederik Neubert; Barbara Schoendube-Pirchegger (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg) |
| Abstract: | This paper investigates incentive effects from subjective performance evaluation (SPE) in an agency setting. An employee (agent) is evaluated by his superior (principal) via a subjective, potentially biased, performance report. We assume that this subjectiveness in evaluation affects the utility of both players, causing costs from biasing the report to the principal and benefits (costs) from over- (under-) evaluation to the agent. If the superior chooses the reporting bias sequentially optimal, we find that benefits from subjective, as opposed to objective performance measurement, do not outweigh its costs. If, in contrast, the supervisor is able to commit to an ex ante optimal bias choice, SPE can be beneficial if the agent’s preference for over-evaluation is sufficiently strong. While a centrality bias arises independent from the supervisor’s ability to commit, a leniency bias results only along with an ex ante optimal bias. |
| Keywords: | agency, subjective performance evaluation, behavioral accounting, accuracy, leniency, centrality |
| JEL: | C72 D82 M40 M52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:mag:wpaper:25003 |
| By: | Shuhua Si |
| Abstract: | Economic choices are often stochastic: the same person may make a different choice when facing the same alternatives repeatedly. Standard models assume that the degree of randomness reflects the size of utility differences, but choice inconsistencies could also reflect difficulty comparing alternatives. Recent studies estimate such comparison difficulty (or "complexity") by fitting functional forms to aggregate choice data under a representative agent assumption. However, aggregate data could violate standard models of random choice simply because of heterogeneity in preferences, even in the absence of variation in comparison difficulty. This paper develops a revealed preference framework, collective rationalizability, that tests for variation in comparison difficulty from aggregate data while explicitly accounting for heterogeneity. The framework characterizes whether violations of standard models can be explained by comparison difficulty alone, heterogeneity alone, or require both. I provide a statistical test with finite-sample inference and apply the method to two existing experiments. In both cases, heterogeneity alone explains observed failures of stochastic transitivity well, demonstrating that comparison difficulty can be not only theoretically but also empirically confused with heterogeneity in aggregate data. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.01850 |
| By: | Sam Engle; Chong Pang; Anson Zhou |
| Abstract: | This paper develops a theory of fertility choice with loss aversion over consumption. Because children compete with consumption for household resources, loss-averse households cut fertility aggressively to protect living standards when adverse shocks push consumption below reference levels, but respond modestly to positive shocks. Cross-country panel data and quasi-experimental evidence support the model's predictions. A calibrated version attributes a substantial share of China's recent fertility decline to slowing income growth activating loss aversion. The findings suggest that pro-natalist policies are more effective during downturns, temporary subsidies may backfire upon withdrawal, and pro-fertility regimes should target higher fertility under income uncertainty. |
| Keywords: | Fertility elasticity, loss aversion, family policy |
| JEL: | J11 J13 J18 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:crm:wpaper:26120 |
| By: | Carlos Esteban Posada; Liz Londo\~no-Sierra |
| Abstract: | This paper addresses the structure and dynamics of an open market economy and its relations with the real interest rate. In this respect, the paper is situated within a broad conventional literature. However, it departs from the standard approach to the interest rate by treating it as a control variable. Even so, the analysis concludes that the two main determinants of the interest rate are the future utility discount rate and expectations regarding future multifactor productivity (labor efficiency). Furthermore, increases in such expectations lead to increases in both the interest rate and wages. These results are consistent with to those obtained with the Cass, Koopmans, Ramsey model. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.03966 |
| By: | Ian Gemp; Crystal Qian; Marc Lanctot; Kate Larson |
| Abstract: | Nash equilibrium serves as a fundamental mathematical tool in economics and game theory. However, it classically assumes knowledge of player utilities, whereas economics generally regards preferences as more fundamental. To leverage equilibrium analysis in strategic scenarios, one must first elicit numerical utilities consistent with player preferences, a delicate and time-consuming process. In this work, we forgo precise utilities and generalize the Nash equilibrium to a setting where we only assume a player is capable of providing an ordinal ranking of their actions within the context of other players' joint actions. The key technical challenge is to rethink the definition of a best-response. While the classical definition identifies actions maximizing expected payoff, we naturally look towards social choice theory for how to aggregate preferences to identify the most preferred actions. We define this generalized notion of a context-ordinal Nash equilibrium, establish its existence under mild conditions on aggregation methods, introduce notions of regularization, approximation, and regret, explore complexity for simple settings, and develop learning rules for computing such equilibria. In doing so, we provide a generalization of Nash equilibrium and demonstrate its direct applicability to elicited preferences in human experiments. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.07996 |
| By: | Judy, Andrew (University of Hamburg); Kesternich, Iris (University of Hamburg); Mathevet, Isadora (University of Hamburg); Pugnaghi Zimpelmann, Christian (University of Hamburg) |
| Abstract: | Partners often match on similar characteristics, such as demographics and wages, contributing to inequality between households. We study whether non-wage job amenities—an important part of compensation in the labor market that may also affect household production—play a role in marriage sorting. Using linked survey and administrative data from Germany, we infer individuals’ expected future job attributes from their jobs at the time of matching and estimate a frictionless transferable-utility model. We find positive assortative matching on lifetime earnings, part-time work potential, and schedule regularity, suggesting complementarities within households. In contrast, we find no evidence of sorting on work meaning. Counterfactual simulations show that while assortative matching increases inequality overall, sorting on non-wage amenities slightly reduces it, lowering the Gini coefficient of total compensation by 3.3 percent. |
| Keywords: | marriage market, assortative matching, non-wage amenities, household inequality |
| JEL: | D1 D31 J12 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18644 |