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on Utility Models and Prospect Theory |
| By: | Carmelo Rodríguez à lvarez (Instituto Complutense de Análisis Económico (ICAE), Universidad Complutense de Madrid (Spain)) |
| Abstract: | We analyze strategy-proof rules that select sets of alternatives based on voters’ preferences over those sets. Sets of alternatives represent social choices pending a final resolution and voters are expected utility maximizers that assign probabilities to alternatives within each set using Bayesian updating from a common prior probability assessment. If there are at least three alternatives, then, for generic priors, only dictatorial rules are strategy-proof and unanimous. However, when the prior probability assessment assigns equal probability to all alternatives, strategyproofness also permits rules that select the set of best elements determined by two fixed voters. |
| Keywords: | Strategy-Proofness; Social Choice Functions over Sets; Cardinal Decision Schemes. |
| JEL: | D71 D82 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ucm:doicae:2507 |
| By: | Jiafeng Chen; Lihua Lei; Timothy Sudijono; Liyang Sun; Tian Xie |
| Abstract: | This paper proposes methods for producing compound selection decisions in a Gaussian sequence model. Given unknown, fixed parameters $\mu_ {1:n}$ and known $\sigma_{1:n}$ with observations $Y_i \sim \textsf{N}(\mu_i, \sigma_i^2)$, the decision maker would like to select a subset of indices $S$ so as to maximize utility $\frac{1}{n}\sum_{i\in S} (\mu_i - K_i)$, for known costs $K_i$. Inspired by Stein's unbiased risk estimate (SURE), we introduce an almost unbiased estimator, called ASSURE, for the expected utility of a proposed decision rule. ASSURE allows a user to choose a welfare-maximizing rule from a pre-specified class by optimizing the estimated welfare, thereby producing selection decisions that borrow strength across noisy estimates. We show that ASSURE produces decision rules that are asymptotically no worse than the optimal but infeasible decision rule in the pre-specified class. We apply ASSURE to the selection of Census tracts for economic opportunity, the identification of discriminating firms, and the analysis of $p$-value decision procedures in A/B testing. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2511.11862 |
| By: | L\'or\'ant Nagy; Mikl\'os R\'asonyi |
| Abstract: | We consider a discrete-time model of a financial market where a risky asset is bought and sold with transactions having a transient price impact. It is shown that the corresponding utility maximization problem admits a solution. We manage to remove some unnatural restrictions on the market depth and resilience processes that were present in earlier work. A non-standard feature of the problem is that the set of attainable portfolio values may fail the convexity property. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2511.12093 |
| By: | Osei, Prince (Center for Mathematical Economics, Bielefeld University); Riedel, Frank (Center for Mathematical Economics, Bielefeld University) |
| Abstract: | We study optimal portfolio choice when the variance of asset returns is ambiguous. Building on the smooth model of ambiguity aversion by Klibanoff et al. (2005), we introduce a one-period framework in which returns follow a Variance–Gamma specification, obtained by mixing a normal distribution with a gamma prior on the variance. This structure captures empirically observed excess kurtosis and allows us to derive closed-form solutions for optimal demand. Our main results show that ambiguity about volatility leads to bounded portfolio positions, in sharp contrast to the unbounded exposures predicted by the classical CAPM when expected excess returns are large or when the mean variance tends to zero. We characterize the comparative statics of the optimal allocation with respect to risk aversion, ambiguity aversion, and the parameters of the prior distribution. For small mean excess returns, portfolio demand converges to the CAPM benchmark, indicating that ambiguity aversion affects higher-order terms only. The model provides a tractable link between robust portfolio choice and realistic, heavy-tailed return dynamics. |
| Date: | 2025–11–27 |
| URL: | https://d.repec.org/n?u=RePEc:bie:wpaper:756 |
| By: | Liu, Pengcheng; Xie, Qing; You, Yi; Dong, Qingqing |
| Abstract: | Consumers are presented with increasingly difficult choice tasks and are experiencing more choice overload during the decision-making process. Based on the emotion-imbued choice model and incorporating subjective state consequences into the framework of experienced utility, this research constructed a systematic scale to measure choice overload in several decision-making stages. This research conducted three experiments using liquid milk as a consumption product to test whether choice overload would be influenced by increasing the number of attributes, adding similar options, and information nudges, and whether this effect would be heterogeneous in consumer characteristics. Results indicate that more attributes and the addition of similar options would increase the perceived difficulty of choice and result in negative emotions, while information nudges might lessen choice overload and help consumers make decisions. Besides, consumers’ pursuit of maximization also determines their perceived choice overload; maximizers are more likely to experience choice overload than satisficers. |
| Keywords: | Consumer/Household Economics, Food Consumption/Nutrition/Food Safety |
| Date: | 2024–08–07 |
| URL: | https://d.repec.org/n?u=RePEc:ags:iaae24:344272 |
| By: | Lanzani, Giacomo |
| Keywords: | Economics, Applied Economics, Econometrics, Economic Theory, Misspecification, learning, uncertainty aversion, Applied economics, Economic theory |
| Date: | 2025–01–01 |
| URL: | https://d.repec.org/n?u=RePEc:cdl:econwp:qt6zg4w2ff |
| By: | Benami, Elinor; Carter, Michael R.; Hobbs, Andrew; Jin, Zhenong; Kirchner, Ella |
| Abstract: | Agricultural index insurance seeks to protect producers against negative shocks that are common across a prespecified area, i.e., an index insurance zone. Often, administrative boundaries are used to delineate such index insurance zones. However, administrative boundaries may not reflect relevant variations in yield over space, which can be costly for policyholders as well as the public, especially since agricultural insurance is often heavily subsidized. Increased availability of finely resolved geospatial data on agronomic conditions coupled with machine learning approaches to identify similarities promises the ability to reduce losses associated with index insurance by identifying more homogeneous zones. In this work, we examine the changes in welfare impacts of a hypothetical area-yield index insurance when redrawing zone boundaries on the basis of relevant observed agronomic conditions. Drawing upon crop cut data from over 10, 000 maize fields in Kenya from 2016-2020 combined with satellite-based estimates of agronomic conditions, we examine the changes in expected utility to assess the value of data-driven and administrative insurance zones. When keeping the number of insurance zones equal to the number of administrative zones, we find that data-driven zones may offer only slightly higher risk reduction value than administrative zones. If no set number of zones are prespecified, the data-driven approach offers a flexible approach to identify an optimal number of zones that balances costs and performance. This approach can help inform program design as well as impact evaluations, as it further sheds light on trade-offs between the costs of ground sampling and zone size that can inform how to design and evaluate new programs in resource-constrained environments for maximum impact. |
| Keywords: | Agricultural Finance, International Development, Risk and Uncertainty |
| Date: | 2024–08–27 |
| URL: | https://d.repec.org/n?u=RePEc:ags:iaae24:344685 |
| By: | Takushi Kurozumi; Yu Sugioka; Willem Van Zandweghe |
| Abstract: | Research in labor economics has documented evidence of labor market monopsony. Nevertheless, macroeconomic studies routinely consider households' wage-setting under monopolistic competition. We introduce firms' wage-setting under monopsonistic competition in an otherwise standard sticky-price model. This substantially alters the implications for wage dynamics, welfare, and policy. Compared to its counterpart model with monopolistic wage-setting, our model indicates that the wage Phillips curve includes the wage markdown as its main driver and has a steeper slope generated by strategic substitutability in wage-setting, and that the second-order approximation to households' utility functions is of the same form but with a smaller welfare weight on wage growth variability. Consequently, a welfare-maximizing policy features stabilizing inflation rather than wage growth. |
| Keywords: | labor market monopsony; wage markdown; strategic substitutability; staggered wage-setting; timeless-perspective policy; inflation stabilization |
| JEL: | E24 E52 J42 |
| Date: | 2025–11–19 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedcwq:102125 |
| By: | G. Du |
| Abstract: | We propose a unified microeconomic theory that takes the behavioral rules of firms in real markets as the endogenous mechanism through which market structures are generated, replacing the standard practice of imposing perfect competition, monopoly, and other market forms as exogenous assumptions. Under a set of minimal axioms (consumer utility maximization, firm profit maximization, firm entry/exit mechanisms, and market clearing) and by introducing realistic cost and demand structures (firm-level cost heterogeneity, fixed costs, and demand elasticity, among others), pricing behavior and market structures long treated as exogenous (such as perfect competition and monopoly) are derived endogenously as equilibrium outcomes of firms' profit-maximizing behavior. Within a single framework, the theory nests traditional cost and marginal analysis, game-theoretic approaches to imperfect competition, and the Walrasian general equilibrium model; different regions of the parameter space naturally yield equilibrium outcomes corresponding to perfect competition, monopoly, monopolistic competition, and competitive-fringe structures. Our analysis shows that perfect competition is only a highly symmetric and intrinsically unstable equilibrium point: even small cost differences suffice to push the system toward more common monopoly or oligopoly configurations, while positive feedback mechanisms render these structures stable, helping to explain why market power is not easily competed away. Under empirically observable premises, the theory coherently derives the principal market forms and, in doing so, clarifies the domains of applicability of various classic models. It can also be used to predict which market structures industries will evolve toward under given conditions, providing a unified and operational theoretical foundation for empirical research, industrial policy, and firms' business and competitive strategy decision-making. |
| Date: | 2025–11–10 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:auvmp_v1 |
| By: | Luca Corazzini; Elisa Deriu; Marco Guerzoni |
| Abstract: | Large language models (LLMs) increasingly mediate economic and organisational processes, from automated customer support and recruitment to investment advice and policy analysis. These systems are often assumed to embody rational decision making free from human error; yet they are trained on human language corpora that may embed cognitive and social biases. This study investigates whether advanced LLMs behave as rational agents or whether they reproduce human behavioural tendencies when faced with classic decision problems. Using two canonical experiments in behavioural economics, the ultimatum game and a gambling game, we elicit decisions from two state of the art models, Google Gemma7B and Qwen, under neutral and gender conditioned prompts. We estimate parameters of inequity aversion and loss-aversion and compare them with human benchmarks. The models display attenuated but persistent deviations from rationality, including moderate fairness concerns, mild loss aversion, and subtle gender conditioned differences. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2511.12319 |
| By: | Zhen, Shihang; Xia, Xianli; Huang, Luchen; Cao, Yihan; Fu, Hanliang; Ren, Yanjun |
| Abstract: | With the prominence of nutrition-related health issues worldwide, functional food is supposed to be an efficient way to address this challenge by achieving its nutrition and health benefits. However, whether consumers are willing to pay (WTP) for high-nutritional value foods of this kind and what is the role of consumers’ risk preferences in their WTPs are unclear. This study employs a discrete choice experiment (DCE) to investigate the effect of risk preferences on consumers’ preferences and WTPs for functional food, focusing on four attributes of dairy products: origin, organic label, functionality and price. We also seek to understand the physiological mechanisms underlying this effect by a lab experiment using eye-tracking technology. The results show that consumers have various preferences and WTPs for different attributes of milk, but they are reluctant to pay for functional milk. Compared to consumers with low-risk preferences, consumers with high-risk preferences are more willing to purchase functional milk. The evidence from eye-tracking experiments indicates that visual attention to the attributes considered positively correlates with their consumption preference. Consumers with high-risk preferences tend to pay more attention to the functional attribute and therefore have a higher prob- ability of purchasing functional milk. This study implies that consumers’ risk preferences should be considered when promoting consumers to purchase functional food, as different consumers have significantly distinct preferences. |
| Keywords: | Food Consumption/Nutrition/Food Safety, Institutional and Behavioral Economics |
| Date: | 2024–08–07 |
| URL: | https://d.repec.org/n?u=RePEc:ags:iaae24:344293 |
| By: | Dorn, Franziska |
| Abstract: | A comprehensive understanding of economic deprivation requires examining income, the value of unpaid household services, and leisure. These concepts can be understood either through subjective utility or objective indicators such as measurable expenditures and time use, and much depends on how they are theorized. Divergent economic theories lead to different methods for estimating the market value of non-market work, which significantly impacts the definitions of household income and time poverty. Most empirical studies of time and income poverty identify deprivation by measuring shortfalls in unpaid household work once minimum thresholds for leisure and paid work are set. These approaches, however, primarily reflect household budget constraints rather than the combined bundle of time and income needed to sustain a standard of living above poverty. To advance poverty measurement, it is essential to examine time and income jointly and recognize their interdependence, as money can buy time, and time can save money. This paper examines the conceptual challenges involved in integrating time and income into a unified framework, including the evaluation of thresholds, the substitutability between time and income, and the valuation of unpaid work. Addressing these issues clarifies how integrated measures of time and income poverty can more accurately capture the resources required for the development of human capabilities. |
| Keywords: | poverty, time use, gender inequality, living standard, unpaid work, measurement |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ifsowp:331893 |
| By: | Hyeyoon Jung; Jaehoon (Kyle) Jung |
| Abstract: | We study the economics of homeowners’ property insurance by examining how contract design balances the trade-off between incentive alignment and risk sharing. Using granular contract-level property insurance data merged with property-level disaster risk for millions of U.S. households, we develop and structurally estimate a model in which insurers optimally determine contract terms given property risk and household risk preferences. The estimates provide, to our knowledge, the first large-scale contract-level structural measures of risk aversion, risk premia, and the cost of moral hazard, allowing us to quantify how disaster risk is allocated between insurers and households. We find that the cost of moral hazard is small, yet the very mechanism used to mitigate it substantially increases households’ exposure to disaster risk: contract design leaves policyholders exposed to roughly 29 percent of total expected losses. This residual exposure is most pronounced for low-FICO households and for properties with the greatest tail risk. Counterfactuals indicate that mandating full insurance would lead to substantial market exit, increasing household vulnerability. We further show that insurers’ financial constraints are systematically correlated with the riskiness of underwritten properties and with household characteristics. |
| Keywords: | insurance; financial constraints; household finance; moral hazard; contracting |
| JEL: | C6 D8 G1 G2 G3 |
| Date: | 2025–11–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:102161 |
| By: | Javier Bianchi; Saki Bigio |
| Abstract: | We study settlement frictions that arise from the need to finance negative balances through an over-the-counter (OTC) market. We derive a closed-form expression for the endogenous convenience yield and show how it can be incorporated into a canonical portfolio problem. Using this framework, we examine how shifts in settlement frictions affect liquidity premia, the volume of overnight funding, the dispersion of market rates, and optimal portfolio allocations. From a normative perspective, we show that in the competitive equilibrium, investors may either over- or under-invest in liquid assets; moreover, both higher risk aversion and tighter aggregate liquidity increase the likelihood of under-accumulation. |
| JEL: | E40 E44 E49 E50 E52 G11 G21 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34474 |
| By: | Nan Liu; Yanbo Liu; Yuya Sasaki; Yuanyuan Wan |
| Abstract: | We develop methods for nonparametric uniform inference in cost-sensitive binary classification, a framework that encompasses maximum score estimation, predicting utility maximizing actions, and policy learning. These problems are well known for slow convergence rates and non-standard limiting behavior, even under point identified parametric frameworks. In nonparametric settings, they may further suffer from failures of identification. To address these challenges, we introduce a strictly convex surrogate loss that point-identifies a representative nonparametric policy function. We then estimate this surrogate policy to conduct inference on both the optimal classification policy and the optimal policy value. This approach enables Gaussian inference, substantially simplifying empirical implementation relative to working directly with the original classification problem. In particular, we establish root-$n$ asymptotic normality for the optimal policy value and derive a Gaussian approximation for the optimal classification policy at the standard nonparametric rate. Extensive simulation studies corroborate the theoretical findings. We apply our method to the National JTPA Study to conduct inference on the optimal treatment assignment policy and its associated welfare. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2511.14700 |
| By: | Kopp, Thomas; Dsouza, Alwin; Mishra, Ashok K. |
| Abstract: | Risk aversion among farmers in developing and emerging economies (DEE) often leads to underinvestment and lower profitability. However, contract farming may mitigate these negative effects by providing stability and resources. This study examines the selection of farmers into contract types, hypothesizing that production contract firms prefer risk-averse farmers due to their compliance and adherence to strict guidelines. Using survey data from 660 okra farmers in Karnataka, India, we apply an instrumental variable approach to address endogeneity. The results confirm that risk-averse farmers are disproportionately selected for production contracts, which offer significantly higher profitability than marketing contracts. Moreover, while risk aversion generally reduces farm profitability, the benefits of production contracts outweigh this disadvantage. These findings suggest that contract farming can improve the economic outcomes of vulnerable farm households. From a policy perspective, facilitating access to production contracts may enhance farm resilience and sustainability. |
| Keywords: | Agribusiness, Agricultural Finance, Production Economics, Risk and Uncertainty |
| URL: | https://d.repec.org/n?u=RePEc:ags:aes025:356801 |