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on Utility Models and Prospect Theory |
| By: | Stark, Oded (University of Bonn); Balbus, Lukasz (University of Zielona Gora) |
| Abstract: | The purpose of this paper is to provide a general proposition of the relationship between altruism and risk taking. As explained in the body of the paper, we diverge from a result reported in Stark et al. (2022) and provide an expansion and a generalization of a preliminary result reported in Stark (2024). In a broad utility framework, we study the risk aversion of an altruistic person who is an active donor (benefactor) and the risk aversion of a beneficiary of an altruistic transfer. In both cases, we find that altruism lowers risk aversion. The specific case in which the utility functions of the benefactor and of the beneficiary are constant relative risk aversion (CRRA) functions constitutes a vivid example of lesser risk aversion characterization. We conclude that in terms of risk-taking behavior, a "population" endowed with altruism is uniformly more willing to take risks than a comparable "population" devoid of altruism. |
| Keywords: | altruism, altruistic transfers, the absolute risk aversion of a practicing altruistic person, intensity of altruism, variation in risk-taking preferences, the absolute risk aversion of a beneficiary of an altruistic transfer |
| JEL: | D01 D64 D81 G41 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17506 |
| By: | Abdellaoui, Mohammed (HEC Paris); Hill, Brian (HEC Paris); Akella, Sarat Chandra (HEC Paris) |
| Abstract: | A popular framework for ambiguity represents alternatives of choice as twostage gambles reflecting the uncertainty about the true probability on the state space. In this framework, ambiguity-averse behaviour could be driven by differences in utilities between stages-as in the smooth ambiguity model (Klibanoff et al., 2005)-or by non-linear probability weighting-as in a line of research initiated by Segal (1987). The present paper investigates the relevance of these distinct drivers of ambiguity attitudes in a two-stage setup by estimating a generalization of the smooth ambiguity model incorporating probability weighting. Our experiment reveals the relevance of both factors to describing ambiguity attitudes. We also report evidence of stakes-dependence of ambiguity attitudes, as implied by utility-driven approaches. |
| Keywords: | Ambiguity; ambiguity aversion; probability weighting; rank-dependent utility; recursive expected utility; smooth ambiguity model |
| JEL: | C11 D80 D81 D83 |
| Date: | 2024–08–26 |
| URL: | https://d.repec.org/n?u=RePEc:ebg:heccah:1530 |
| By: | Niousha Bagheri; Milad Ghasri; Michael Barlow |
| Abstract: | This paper introduces a framework for capturing stochasticity of choice probabilities in neural networks, derived from and fully consistent with the Random Utility Maximization (RUM) theory, referred to as RUM-NN. Neural network models show remarkable performance compared with statistical models; however, they are often criticized for their lack of transparency and interoperability. The proposed RUM-NN is introduced in both linear and nonlinear structures. The linear RUM-NN retains the interpretability and identifiability of traditional econometric discrete choice models while using neural network-based estimation techniques. The nonlinear RUM-NN extends the model's flexibility and predictive capabilities to capture nonlinear relationships between variables within utility functions. Additionally, the RUM-NN allows for the implementation of various parametric distributions for unobserved error components in the utility function and captures correlations among error terms. The performance of RUM-NN in parameter recovery and prediction accuracy is rigorously evaluated using synthetic datasets through Monte Carlo experiments. Additionally, RUM-NN is evaluated on the Swissmetro and the London Passenger Mode Choice (LPMC) datasets with different sets of distribution assumptions for the error component. The results demonstrate that RUM-NN under a linear utility structure and IID Gumbel error terms can replicate the performance of the Multinomial Logit (MNL) model, but relaxing those constraints leads to superior performance for both Swissmetro and LPMC datasets. By introducing a novel estimation approach aligned with statistical theories, this study empowers econometricians to harness the advantages of neural network models. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.05221 |
| By: | Astebro, Thomas B. (HEC Paris); Fossen, Frank M. (University of Nevada); Gutierrez, Cédric (Bocconi University) |
| Abstract: | Entrepreneurship scholars are interested in understanding and describing how entrepreneurs make decisions under uncertainty, where the probabilities of outcomes are not known but perceived, resulting in ambiguous probabilities. In this context, ambiguity refers to the lack of precise and objective probability assessments and the presence of subjective judgments regarding potential outcomes. In this chapter, we discuss the development of thought on how entrepreneurs perceive and react to uncertainty from Frank Knight (1921) to the present day. Recognizing that entrepreneurs face uncertainty rather than risk and are unlikely to have estimates of all probabilities for all potential outcomes, it becomes difficult to accept Expected Utility Theory (EUT), developed by Savage (1951) and von Neumann and Morgenstern (1953), as a relevant model for entrepreneurial decision-making. We examine a range of decision theories, ranking them in an order starting from EUT and proceeding to the most structure-free models of entrepreneurial choice, allowing for comparisons and contrasts of the main components and underlying concepts as they apply to entrepreneurial decision making. |
| Keywords: | entrepreneurship; uncertainty; ambiguity; decision theory; Bayesian Entrepreneurship |
| JEL: | J24 L26 |
| Date: | 2024–08–21 |
| URL: | https://d.repec.org/n?u=RePEc:ebg:heccah:1529 |
| By: | Aleksandra Conevska; Can Mutlu |
| Abstract: | In this paper, we address a longstanding puzzle over the functional form that better approximates voter's political utility. Though it has become the norm in the literature to represent the voters' political utility with concave loss functions, for decades scholars have underscored this assumption's potential shortcomings. Yet there exists little to no evidence to support one functional form assumption over another. We fill this gap by first identifying electoral settings where the different functional forms generate divergent predictions about voter behavior. Then, we assess which functional form better matches observed voter and abstention behavior using Cast Vote Record (CVR) data that captures the anonymized ballots of millions of voters in the 2020 U.S. general election. Our findings indicate that concave loss functions fail to predict voting and abstention behavior and it is the reverse S-shaped loss functions, such as the Gaussian function, that better match the observed voter behavior. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.03196 |
| By: | H. Spencer Banzhaf |
| Abstract: | The Random Utility Model (RUM) is a workhorse model for valuing new products or changes in public goods. But RUMs have been faulted along two lines. First, for including idiosyncratic errors that imply unreasonably high values for new alternatives and unrealistic substitution patterns. Second, for involving strong restrictions on functional forms for utility. This paper shows how, instead, starting with a revealed preference framework, one can partially identify nonparametrically the answers to policy questions about discrete alternatives. When the Generalized Axiom of Revealed Preference (GARP) is satisfied, the approach weakly identifies a pure characteristics model. When GARP is violated, it recasts the RUM errors as departures from GARP (critical cost efficiency), to be minimized using a minimum-distance criterion. This perspective provides an alternative avenue for nonparametric identification of discrete choice models. The paper illustrates the approach by estimating bounds on the values of ecological improvements in the Southern Appalachian Mountains using survey data. |
| JEL: | C14 C25 C61 D12 Q51 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33225 |
| By: | Bryzgalova, Svetlana; Huang, Jiantao; Julliard, Christian |
| Abstract: | Using information in returns we identify the stochastic process of consumption. We find that aggregate consumption reacts over multiple quarters to innovations spanned by financial markets, and this persistent component accounts for over a quarter of consumption variation. These shocks are cross-sectionally priced, drive most of the time series variation in stocks, and a small, yet significant, share of volatility of bonds. Nevertheless, we find no support for stochastic volatility of consumption driving timevarying risk premia. Finally, an otherwise standard recursive utility model based on our estimated process explains both equity premium and risk-free rate puzzles with low risk aversion. |
| Keywords: | consumption dynamics; asset returns; consumption-based asset pricing; term structure |
| JEL: | E21 E27 G12 E43 C11 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:126152 |
| By: | Harashima, Taiji |
| Abstract: | Why are most products in retail stores designed, packaged, and decorated attractively? In this paper, I present a model of how consumers obtain utility from a “sense of play” with the designs and decorations of products that are separate from their practical usefulness. Here, “play” has a broad meaning and includes activities and feelings that are not functional or necessary, e.g., recreation, diversion, playfulness, and entertainment. The model shows that as an economy grows and develops, the relative importance of a sense of play increases compared to the practical usefulness of products and the economy as a whole; in response, products become more sophisticatedly designed and heavily decorated. Therefore, economies evolve toward “play-oriented economies, ” where a sense of play becomes an important element in marketing, and this biases estimates of purchasing power parity. |
| Keywords: | Economic utility, marketing, play |
| JEL: | E21 M31 O10 |
| Date: | 2024–12–01 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122815 |
| By: | Joan Costa-Font; Frank Cowell; Joan Costa-i-Font |
| Abstract: | This paper examines a behavioural explanation for the Brexit referendum result, the role of an individual’s inequality aversion (IA). We study whether the referendum result was an “unconsidered Leave” partially driven by people’s low aversion to inequality. We use a representative sample of the UK population fielded in 2017, and analyse the extent to which lottery-based individual IA estimates predict their Brexit vote. We consider alternative potential drivers of IA in both income and health domains; these include risk aversion, locus of control, alongside socio-economic and demographic characteristics. A greater aversion to income inequality predicts a lower probability of voting for Leave, even when controlling for risk aversion and other drivers of the Brexit vote. This effect is only true among men, for whom an increase in income IA by one standard deviation decreases their likelihood of voting for leaving the EU by 5% on average. Had there been a greater IA, the overall referendum result might have been different. However, the effect of health inequality aversion is not significantly different from zero. |
| Keywords: | Brexit, inequality aversion, income inequality aversion, health inequality aversion, imaginary grandchild, risk aversion, locus of control |
| JEL: | H10 I18 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11468 |
| By: | Luís Filipe da Silva Martins (Universidade de Coimbra, CeBER, Faculdade de Economia); Diogo Pinheiro (Department of Mathematics, Brooklyn College of the City University of New York, and Department of Mathematics, Graduate Center of the City University of New York); Alberto A. Pinto (LIAAD–INESC TEC, Departmento de Matemática, Faculdade de Ciências, Universidade do Porto,) |
| Abstract: | We employ a duality approach and martingale techniques to characterize the solutions to a stochastic optimal control problem modeling the choices available to an economic agent seeking to maximize the expected utility derived from consumption, terminal wealth, and life insurance coverage, while facing both investment risks and mortality uncertainty. The agent dynamically allocates wealth between a financial market composed of one risk-free asset and multiple risky assets, and term life insurance premiums subject, respectively, to uncertainty associated with the market conditions and the agent uncertain lifespan. Our results provide insights into the trade-offs between consumption, wealth accumulation, and life insurance demand in the presence of financial and mortality risks. |
| Keywords: | Stochastic optimal control; Convex duality; Martingale methods; Consumption-investment problem; Life-insurance.; Stochastic optimal control; Convex duality; Martingale methods; Consumption-investment problem; Life-insurance. |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:gmf:papers:2024-05 |
| By: | Pashchenko, Svetlana; Jang, Youngsoo; Porapakkarm, Ponpoje |
| Abstract: | Should public policies address inequality due to heterogeneous life expectancy? Intuitively, taking short life as a disadvantage, such policies should favor those with high mortality. Yet, pension systems implicitly redistribute from low-life-expectancy to high-life-expectancy people. Moreover, this direction of redistribution is optimal from the perspective of the standard utilitarian welfare criterion. We study mortality-related redistribution in a more flexible setting. We start by establishing a formal framework for the analysis by clearly distinguishing between the redistribution along mortality and income dimensions, and thus between mortality and income progressivity. We then show that it is optimal to redistribute towards high-mortality people in two cases. First, when welfare criterion features aversion to lifetime inequality which exceeds aversion to consumption inequality. Second, when income and mortality are negatively correlated, and income redistribution tools are limited. |
| Keywords: | Mortality-related redistribution, Welfare criteria, Pensions, Prioritarianism |
| JEL: | D30 D60 D63 |
| Date: | 2024–10–24 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122662 |
| By: | Marc Kaufmann; Joël Machado; Bertrand Verheyden |
| Abstract: | Empirical evidence suggests that the majority of immigrants who initially planned a temporary stay end up staying permanently in the host country. Since beliefs about the duration of stay are a strong determinant of integration, many long-term migrants may end up less than optimally integrated. We theoretically model migrants with potential misperceptions about their future utility and wage prospects in the host country relative to their country of origin. We describe conditions under which these misperceptions generate, and conditions on observables that identify, unexpected staying. These conditions involve pessimism about the endogenous long-term wage for which migrants are indifferent between staying and leaving: either they overestimate the probability of earning less than this indifference wage, or they underestimate their utility in the destination country when earning this wage. Using the German Socio-Economic Panel (SOEP), we find that higher levels of pessimism about utility and wages at arrival are associated with staying in the long-term in Germany despite having initially predicted a temporary stay. |
| Keywords: | Migrant integration, return intentions, unexpected staying, misperceptions, pessimism; SOEP |
| JEL: | F22 D91 J61 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwsop:diw_sp1215 |
| By: | Frijters, Paul |
| Abstract: | While in his early years, Kahneman followed the world of classic utilitarianism in which smart individuals base decisions on how they will truly feel each moment in the future, Kahneman in Mandel (2018) adopted a very different position, namely that what matters is the story people tell of their lives. He thus grappled with evolving stories of both the future and the past, and the presence of different decision-supporting evaluations for the short-run and the long-run. |
| Keywords: | Kahneman; happiness; satisfaction; updating; utility; wellbeing |
| JEL: | D60 I31 |
| Date: | 2024–10–31 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:126105 |
| By: | Edoardo Berton; Marzia De Donno; Marco Maggis |
| Abstract: | In an arbitrage-free simple market, we demonstrate that for a class of state-dependent exponential utilities, there exists a unique prediction of the random risk aversion that ensures the consistency of optimal strategies across any time horizon. Our solution aligns with the theory of forward performances, with the added distinction of identifying, among the infinite possible solutions, the one for which the profile remains optimal at all times for the market-adjusted system of preferences adopted. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.01748 |
| By: | Biais, Bruno (HEC Paris); Gersbach, Hans (ETH Zurich); Rochet, Jean-Charles (University of Toulouse Capitole); von Thadden, Ernst-Ludwig (Universitaet Mannheim); Villeneuve, Stéphane (University of Toulouse 1) |
| Abstract: | This paper analyzes 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 reservation utility. We extend classical welfare theorems by showing that any incentive-constrained optimal allocation can be implemented as an equilibrium allocation, with appropriate transfers and wealth taxation by the principal. |
| Keywords: | Dynamic contract theory; mechanism design; large economies; allocative efficiency; incentive-compatibility; mean-field games; implementation |
| JEL: | C61 D82 D86 D92 E22 |
| Date: | 2024–04–11 |
| URL: | https://d.repec.org/n?u=RePEc:ebg:heccah:1516 |
| By: | Morabito, Leo (University of Milan); Scoppa, Vincenzo (University of Calabria) |
| Abstract: | Subjective evaluations in many contexts might be affected by decision-makers' social preferences. To explore this phenomenon, we use data from soccer referees' decisions. According to soccer rules, referees are expected to evaluate each episode independently, without taking into account previous decisions. However, if referees are averse to creating inequities between teams, they might seek to balance their decisions and, for example, after awarding a penalty to the home team, they may raise the evidence threshold for awarding a second penalty to the same team, while lowering it for awarding a penalty to the away team. First, we offer a simple theoretical model to explain these insights. Then, using detailed minute-by-minute commentary data from approximately 21, 400 matches in major European leagues, we show a strong preference by referees to treat teams fairly: they reduce the probability of awarding a penalty (or a red or yellow card) to a team if it has already been awarded to that team, while increasing the probability if it has been awarded to the opposing team. In the final part, focusing on injury time, we show that referees tend to lengthen injury time both when the home team is behind and when the away team is behind, suggesting that referees may have a preference for treating both teams fairly. |
| Keywords: | subjective evaluations, social preferences, inequity aversion, compensatory behavior, social pressure, soccer, behavioral economics |
| JEL: | D91 L83 Z20 D63 Z28 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17512 |
| By: | Mingyuan Ban; Yi Qian; Qiang Gong; Karl Aquino |
| Abstract: | Just and efficient allocations of charity have attracted much academic and media attention. The sources of inefficiency and unjust are important to understand yet understudied. Our study aims to fill this void by directly modelling the victims’ market in a collective reputation framework. By analyzing three types of individuals who signal their victim status with different personalities and incentives, we derive the honest, dishonest and unfunded equilibria as well as the mixed equilibrium where both types of these equilibria could coexist. Our analyses of the social welfare under each equilibrium shed light on key parameters that could potentially serve as policy instruments for improving social welfare. We also reveal that the mechanisms analogous to bank run and lemons market could take place in the victims’ market as much as in other markets. In particular, when charity resources are scarce, more strategic signallers could rush to emit false victim signals and drive the market to the dishonest equilibrium with lower social welfare. The need for screening signallers could drive up the psychological costs of authentic victims to the extent that they voluntarily drop out of the market and suffer alone, resulting in misplaced charity funds and severe deadweight losses. When there is psychological utility associated with cheating for the hedonic signallers, the social welfare is even worse off. |
| JEL: | C7 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33327 |
| By: | Karine Moukaddem (Aix-Marseille School of Economics, Aix-Marseille University); Marion Dovis (Aix-Marseille School of Economics, Aix-Marseille University); Josephine Kass-Hanna (IESEG School of Management); Léa Bou Khater (AUB); Eva Raiber (Aix-Marseille School of Economics) |
| Abstract: | Migration aspirations, the hope and ambition to leave the origin country, are recognized as the key initial step that may lead to actual migration. Drawing on data from a nationally representative survey conducted in Lebanon among 1, 500 women aged 18-35, this study investigates the role of social networks and life aspirations (education, career, marriage and fertility) in shaping migration aspirations, in a context of severe economic crisis and massive emigration wave. Based on a stylized model that integrates aspirations into a standard utility maximization problem, we postulate that individuals aspire to migrate if their life aspirations cannot be locally fulfilled. Furthermore, we focus on local networks to examine their influence on women’s migration aspirations. Our analysis reveals a peer effect, where a higher share of women’s network planning migration increases their migration aspirations. Additionally, unlikely career and education aspirations, but not family aspirations, are associated with a stronger desire to emigrate. These findings highlight the need for a nuanced approach to understanding the interplay between social networks, aspirations, and migration decisions. They offer valuable insights for researchers and policymakers aiming to address the drivers of women’s emigration in Lebanon and other crisis contexts. |
| Date: | 2024–08–20 |
| URL: | https://d.repec.org/n?u=RePEc:erg:wpaper:1715 |
| By: | Andreas Irmen |
| Abstract: | A balanced growth path that accounts for a decline in hours worked per worker approximates the evolution of today’s industrialized countries since 1870. This stylized fact is explained in an OLG-model featuring two-period lived individuals equipped with per-period utility functions of the generalized log-log type proposed by Boppart and Krusell (2020) and a neoclassical production sector. Technological progress drives real wages up and expands the amount of consumption goods. The value of leisure increases, and the supply of hours worked declines. Technological progress moves a poor economy out of a regime with low wages and an inelastic supply of hours worked into a regime with high wages and a declining supply of hours worked. The balanced growth path is unique and stable. In the high wage regime, the equilibrium difference equation is available in closed form. A balanced growth path with declining hours worked may also be obtained with endogenous technological progress as in Romer (1986). |
| Keywords: | technological change, comparative economic development, endogenous labor supply, neoclassical endogenous growth, OLG-model |
| JEL: | D15 J22 O33 O41 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11492 |
| By: | Aizawa, Hiroki; Saka, Takuhiro |
| Abstract: | Remote work can affect population distribution in an urban system (i.e., a chain of cities). The current paper explores the effects of remote work on population distribution in an urban system, welfare, and utilities of workers. To examine these effects, we explore the equilibria of a New Economic Geography model that expresses remote workers. We elucidate the bifurcation mechanism of the full agglomeration in a narrow corridor with NEG models with two industries and remote work in order to investigate the effect of remote work on equilibrium. We demonstrate that the introduction of remote work can decrease the utilities of workers. We show that remote workers with myopic behavior themselves decrease their own utilities. With myopic behavior, it is not necessarily ensured that remote workers can obtain higher utilities compared to those with population distribution before the introduction of remote work. |
| Keywords: | Agglomeration; Bifurcation; Economic geography; Remote work; Welfare |
| JEL: | R12 R14 |
| Date: | 2024–12–08 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122913 |
| By: | Clarke, Jeanelle |
| Abstract: | Access to credit is a key component for business development. Yet, for women in Latin America and the Caribbean, there are barriers which hinder this access, hamper women’s entrepreneurship and slow economic empowerment efforts in the region. One of these barriers is risk aversion, both as supply and demand constraint. On the supply side, financial institutions may exhibit inherent gender bias by providing lower levels of financing and higher interest rates to women entrepreneurs. On the demand side, women entrepreneurs may refrain from approaching financial institutions for fear of rejection or unfavourable terms of credit. The number of women entrepreneurs has grown within the region and represents an important area of opportunity for inclusive economic development. Financial institutions have a role to play in widening access to credit to support women’s entrepreneurship. It has been found that targeted gender responsive financing programmes can be highly effective at widening access and combatting negative gender bias. In Latin America and the Caribbean, successful examples have focused on creating innovative financial products that cater to the unique characteristics of women entrepreneurs, providing financial education and training, using appropriate indicators to determine financial needs. |
| Date: | 2024–12–30 |
| URL: | https://d.repec.org/n?u=RePEc:ecr:col035:81174 |
| By: | Hao Chung; Ke Wu; Elaine Shi |
| Abstract: | Today, many auctions are carried out with the help of intermediary platforms like Google and eBay. We refer to such auctions as platform-assisted auctions.Traditionally, the auction theory literature mainly focuses on designing auctions that incentivize the buyers to bid truthfully, assuming that the platform always faithfully implements the auction. In practice, however, the platforms have been found to manipulate the auctions to earn more profit, resulting in high-profile anti-trust lawsuits. We propose a new model for studying platform-assisted auctions in the permissionless setting. We explore whether it is possible to design a dream auction in thisnew model, such that honest behavior is the utility-maximizing strategy for each individual buyer, the platform, the seller, as well as platform-seller or platform-buyer coalitions.Through a collection of feasibility and infeasibility results, we carefully characterize the mathematical landscape of platform-assisted auctions. We show how cryptography can lend to the design of an efficient platform-assisted auction with dream properties. Although a line of works have also used MPC or the blockchain to remove the reliance on a trusted auctioneer, our work is distinct in nature in several dimensions.First, we initiate a systematic exploration of the game theoretic implications when the service providers are strategic and can collude with sellers or buyers. Second, we observe that the full simulation paradigm is too stringent and leads to high asymptotical costs. Specifically, because every player has a different private outcomein an auction protocol, running any generic MPC protocol among the players would incur at least $n^2$ total cost. We propose a new notion of simulation calledutility-dominated emulation.Under this new notion, we showhow to design efficient auction protocols with quasilinear efficiency. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.03141 |
| By: | Samuel Häfner; Niklas Haeusle; Winfried Koeniger; Alexander Braun |
| Abstract: | We develop a model in which large risk-neutral firms and individual risk-averse consumers compete to employ heterogeneous workers by posting compensation menus. Production takes time, and we analyze how screening motives interact with the desire to smooth consumption. There is a unique symmetric separating equilibrium that is also efficient. In equilibrium, the extent to which the compensation scheme delays payment until the production quality becomes known depends on whether, and to which extent, the consumers are financially constrained. We discuss how our model relates to the design of compensation schemes in current online peer-to-peer markets. |
| Keywords: | adverse selection, self selection, peer-to-peer markets, labor markets, capital market imperfections |
| JEL: | D15 D82 D86 E24 J33 M52 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11488 |
| By: | Guglielmo Briscese; John A. List |
| Abstract: | Field experiments provide the clearest window into the true impact of many policies, allowing us to understand what works, what does not, and why. Yet, their widespread use has not been accompanied by a deep understanding of the political economy of their adoption in policy circles. This study begins with a large-scale natural field experiment that demonstrates the ineffectiveness of a widely implemented intervention. We leverage this result to understand how policymakers and a representative sample of the U.S. population update their beliefs of not only the policy itself, but the use of science and the trust they have in government. Policymakers, initially overly optimistic about the program’s effectiveness, adjust their views based on evidence but show reduced demand for experimentation, suggesting experiment aversion when results defy expectations. Among the U.S. public, support for policy experiments is high and remains robust despite receiving disappointing results, though trust in the implementing institutions declines, particularly in terms of perceptions of competence and integrity. Providing additional information on the value of learning from unexpected findings partially mitigates this trust loss. These insights, from both the demand and supply side, reveal the complexities of managing policymakers’ expectations and underscore the potential returns to educating the public on the value of open-mindedness in policy experimentation. |
| JEL: | C9 C93 H4 H41 O12 O36 P1 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33239 |