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on Utility Models and Prospect Theory |
| By: | Patrick Beissner; Tim Boonen; Mario Ghossoub |
| Abstract: | This paper examines the impact of introducing a Rank-Dependent Utility (RDU) agent into a von Neumann-Morgenstern (vNM) pure-exchange economy with no aggregate uncertainty. In the absence of the RDU agent, the classical theory predicts that Pareto-optimal allocations are full-insurance, or no-betting, allocations. We show how the probability weighting function of the RDU agent, seen as a proxy for probabilistic risk aversion that is not captured by marginal utility of wealth, can lead to Pareto optima characterized by endogenous betting, despite common baseline beliefs. Such endogenous betting at an optimum leads to uncertainty-generating trade arising purely from heterogeneity in the perception of risk, rather than in beliefs. Our results formalize the intuitive understanding that probability weighting can act as an endogenous source of belief heterogeneity, and provide a new behavioral foundation for the coexistence of common beliefs and speculative behavior, in an environment with no initial aggregate uncertainty. Interpreting the RDU agent's nonlinear weighting function as an ``internality'' prompts the question of whether a social planner should intervene. We show how a benevolent social planner can nudge the RDU agent to behave closer to a vNM agent, through costly statistical or financial education, thereby (partially) restoring the optimality of full-insurance allocations. |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2602.24194 |
| By: | Zhaoqi Zang; David Z. W. Wang; Xiangdong Xu; Shaojun Liu |
| Abstract: | Time variability is a pervasive feature of mobility services and a major source of welfare loss. Although literature has quantified the cost of time variability (COTV), it remains theoretically unclear how bad time variability can be in the worst case. Without such a benchmark, quantified variability costs lack a principled reference for assessing whether they are economically meaningful. Meanwhile, this benchmark is critical for strategic prioritization in transport appraisal, service design, and pricing -- particularly in early-stage decision making where detailed valuation is often infeasible. To fill this gap, this paper develops an expected utility (EU) framework to quantify the cost of time (COT) and COTV, establishing theoretical upper bounds on the ratio $COTV/COT$. For users with quadratic utility, we show $COTV/COT \le 1/2 CV^2$, where $CV$ is the coefficient of variation of service time. For Poisson processes, a common assumption, this bound simplifies to $COTV/COT \le 1/2$, implying the total cost of a stochastic service is at most 1.5 times that of an otherwise identical deterministic service. In more general settings, the ratio depends on three interpretable factors: $CV$ and users' second- and third-order risk preferences, captured by relative risk aversion (RRA) and relative prudence (RP). We identify benchmark values of RRA and RP that characterize preferences over mean-, variance-, and skewness-related reductions. Our analysis extends to non-EU frameworks, including dual theory and rank dependent utility, showing that key structural insights remain robust. By quantifying the cost induced by time variability and the $COTV/COT$ ratio, this study provides a data-light benchmark for early-stage decision making and a principled upper bound on users' willingness to pay for reliability improvements, informing the pricing and design of reliability-oriented services. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.09142 |
| By: | Huan Cai; Ziqing Lu; Catherine Xu; Weiyu Xu; Jie Zheng |
| Abstract: | With recent development of artificial intelligence, it is more common to adopt AI agents in economic activities. This paper explores the economic actions of agents, including human agents and AI agents, in an economic game of trading products/services, and the equilibria in this economy involving multiple agents. We derive a range of equilibrium results and their corresponding conditions using a Markov chain stationary distribution based model. One distinct feature of our model is that we consider the long-term utility generated by economic activities instead of their short-term benefits. For the model consisting of two agents, we fully characterize all the possible economic equilibria and conditions. Interestingly, we show that unless each agent can at least double (not merely increase) its marginal utility by purchasing the other agent's products/services, purchasing the other agent's products/services will not happen in any economic equilibrium. We further extend our results to three and more agents, where we characterize more economic equilibria. We find that in some equilibria, the ``more powerful'' AI agents contribute zero utility to ``less capable'' agents. |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.00858 |
| By: | Francesconi, Marco (University of Essex); Nicoletti, Cheti (University of York); Surana, Khushboo (University of York) |
| Abstract: | We study the role of Gender Role Attitudes (GRA)—beliefs about appropriate roles for men and women—in marital sorting and intra-household allocations. Using the UK Household Longitudinal Study and a multidimensional matching model following Dupuy and Galichon (2014), we estimate the contribution of GRA to the joint marriage utility alongside age, education, BMI, height, health, personality traits, and risk preferences. We find that sorting on GRA is quantitatively important: its contribution to the joint utility is comparable in magnitude to that of education. We apply a decomposition that identifies three main indices underlying the joint utility, with GRA loading heavily on one of the dominant indices jointly with age and education. This GRA-related index strongly predicts subsequent allocations within marriage, including spouses’ shares of housework, childcare, earnings, and paid labour. These findings indicate that GRA are a central dimension of assortative matching and play a meaningful role in shaping intra-household behaviour and gendered labour market outcomes. |
| Keywords: | marital matching, gender role attitude, intrahousehold allocations |
| JEL: | D13 J12 J16 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18459 |
| By: | Luca Di Corato (Department of Economics, Ca’ Foscari University of Venice); Michele Moretto (Department of Economics and Management, University of Padova) |
| Abstract: | This paper studies a continuous-time regulatory problem in which a firm holds persistent private information about demand and is subject to a flow limited-liability constraint. The regulator regulates prices through a dynamic mechanism that ensures truthful reporting of the evolving type. Limited liability imposes a state-dependent lower bound on the firm’s instantaneous utility, inducing a reflecting boundary in continuation utility and giving rise to a tractable singular-control representation. We derive closed-form expressions for the optimal pricing rule and the associated continuation-utility function, and we characterize the optimal up-front transfer required to induce truthful revelation of the firm’s initial type. The resulting contract is fully explicit and highlights how limited liability shapes information rents and regulatory distortions over time. |
| Keywords: | Dynamic regulation, Limited liability, Adverse selection, Continuous-time contracting, Reflecting boundary, Singular control |
| JEL: | D82 D86 L51 H54 C61 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:fem:femwpa:2026.09 |
| By: | Evaluator 1; Evaluator 2; Kevin Kuruc; Julian Jamison; Davit Jintcharadze; David Reinstein |
| Abstract: | We organized three evaluations of the Rethink Priorities report examining GiveWell's discount rate methodology. Evaluators generally affirmed the report's coverage of economic and philosophical literature on discounting. Key findings include agreement on certain GiveWell practices (zero pure time preference, social time preference approach) and disagreements regarding utility curvature treatment and health benefit discounting. A significant critique notes that discounting log consumption increases at 4% equates to over 7% for level-increases, materially affecting organization comparisons. |
| Date: | 2026–01–26 |
| URL: | https://d.repec.org/n?u=RePEc:bjn:evalua:evalsumgivewelldiscount |
| By: | Ambler, Kate; Bakhtiar, M. Mehrab; de Brauw, Alan; Uddin, Mohammad Riad |
| Abstract: | Credit market failures may reflect voluntary withdrawal by risk-averse borrowers in addition to supply-side constraints. We conduct a randomized trial with 1, 517 Bangladeshi households, offering cattle financing through conventional loans or profit-sharing contracts that spread risk between the farmer and the financial partner. Overall, interest in and take-up of the profit-sharing contracts were modestly higher than the conventional loans. However, conventional loan take-up was much lower among risk-averse farmers, and profit-sharing eliminated the take-up gap between risk-averse and non-risk-averse farmers. We find that it is male risk preferences that are associated with these decisions even when contracts explicitly target women. Livestock investment increases under both contracts with no evidence of moral hazard under profit-sharing. |
| Keywords: | gender; credit; financing; livestock; loans; smallholders; financial innovation; access to finance; risk; risk coping strategies; Bangladesh; Southern Asia; Asia |
| Date: | 2026–02–17 |
| URL: | https://d.repec.org/n?u=RePEc:fpr:ifprid:181679 |
| By: | Germain, Antoine (Université catholique de Louvain, LIDAM/CORE, Belgium) |
| Abstract: | This paper studies the consequences of working time reductions when labor markets may be monopsonistic. A toy model shows that the marginal utility of a small working time reduction is negative when workers control schedules but positive when firms set hours. However, the policy increases wage rates in perfect competition but decreases monopsonistic wage rates. I test these predictions empirically by evaluating the first-ever working time reduction in Belgium: the maximum 9h workday in 1910’s coal mines. I find that the policy had sizable negative effects on profits, employment and earnings. To assess welfare, I build a directed search model with matching frictions where firms have heterogeneous productivity and post wages and hours. Utilitarian welfare is expressed in terms of a sufficient statistic whose application to the 1910 reform suggests that the value of leisure was particularly large. |
| Date: | 2025–05–28 |
| URL: | https://d.repec.org/n?u=RePEc:cor:louvco:2025010 |
| By: | Jason Delaney (Georgia Gwinnett College); Sarah Jacobson (Williams College); Thorsten Moenig (Temple University); |
| Abstract: | "Is the assumption that people automatically know their own preferences innocuous? We present a theory that explores the implications of having to discover one's preferences. We show that if tastes must be learned through experience, preferences for some goods will be learned over time, but preferences for other goods will never be learned. This is because sampling a new item has an opportunity cost. Learning is less likely for people who are impatient, risk averse, low income, or short-lived, and for consumption items that are rare, are expensive, must be bought in large quantities, or are initially judged negatively relative to other items. Choices will eventually stabilize, but they need not stabilize at true preferences. A pessimistic bias about untried goods should increase with time. Agents will make choice reversals during the learning process. Welfare loss from suboptimal choices will decline over time but need not approach zero. Overall, our results imply that undiscovered preferences could confound interpretation of choice data of all kinds and could have significant welfare and policy implications." |
| Keywords: | discovered preferences, preference stability, learning |
| JEL: | D83 |
| Date: | 2025–01–01 |
| URL: | https://d.repec.org/n?u=RePEc:wil:wileco:2025_113 |
| By: | Wei Cai; Andrea Prat; Jiehang Yu |
| Abstract: | Incomplete contract theory, supported by anecdotal evidence, suggests that when a firm is acquired, workers may be adversely affected in non-contractible aspects of their work experience. This paper empirically investigates this prediction by combining M\&A events from the Refinitiv database and web-scraped Glassdoor review data. We find that: (a) Controlling for pre-trends, mergers lead to lower satisfaction, especially on non-contractible dimensions of the employee experience (about 6% of a standard deviation); (b) The effect is stronger in the target firm than in the acquiring firm; (c) Text analysis of employee comments indicates that the decline in satisfaction is primarily associated with perceived breaches of implicit contracts. Our findings indicate that mergers may reduce workers' job utility through non-monetary channels. |
| JEL: | D23 G34 J31 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34920 |
| By: | Aaron Bodoh-Creed; Brent Hickman; John List; Ian Muir; Gregory Sun |
| Abstract: | Nonlinear pricing theory predicts that firms can extract surplus by inducing heterogeneous consumers to self-sort across price contract offers that are ex-post optimal for them. We study subscription pricing when the frictionless sorting assumption fails. Using large-scale subscription experiments conducted by Lyft, we document systematic deviations from optimal self-selection: many high-demand consumers decline subscriptions that would have saved them money, while some subscribers fail to break even. We develop a structural model of intensive-margin demand in which consumers may exhibit salience failures, forecast errors about future demand, or impulsivity. We show that subscription uptake can be recast as one-sided noncompliance in a binary-instrument framework, allowing us to leverage LATE methods to identify counterfactual outcome distributions and a novel "uptake function" linking baseline outcomes to compliance behavior. Combining experimental price variation with this identification strategy, we recover utility primitives, demand heterogeneity, and behavioral parameters. Salience failures and forecast errors play quantitatively important roles. Counterfactual analyses show that optimal subscription pricing generates substantial gains relative to linear pricing, but these gains are highly sensitive to consumer deviations from ex-post optimal choice. Implementing nonlinear pricing therefore requires not only optimal contract design for consumer screening, but also coordinated efforts to mitigate behavioral frictions. |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:feb:natura:00834 |
| By: | Gleb Kozliakov; Emile A. Marin; Sanjay R. Singh (Department of Economics, University of California Davis) |
| Abstract: | Can idiosyncratic risk explain the equity premium? We revisit this question using a novel measure of imperfect risk sharing, implied by a large class of heterogeneous agent models, constructed using household-level panel data. We identify a group of households - with relatively high income but low net-worth - whose consumption is sufficiently volatile and risky to explain 94% of the observed U.S. Sharpe ratio for an elasticity of intertemporal substitution of 0.2. In contrast, the consumption dynamics of high net-worth individuals predict a negative Sharpe ratio so do not constitute the relevant pricing factor, consistent with models featuring wealth motives. |
| Keywords: | uninsurable idiosyncratic risk, heterogeneous agents, wealth dynamics, equity premium |
| JEL: | G12 B52 E21 |
| Date: | 2026–03–12 |
| URL: | https://d.repec.org/n?u=RePEc:cda:wpaper:377 |
| By: | Jason Scott; John B. Shoven; Sita Slavov; John G. Watson |
| Abstract: | Target date funds – which initially invest a large share of retirement savings in stocks and shift gradually towards bonds over the life cycle – are designed to provide a “one stop shop” for retirement investing. The rationale for this pattern is that human capital, which is highest at the start of a worker’s career, is “bond-like.” Thus, utility is maximized when financial wealth is initially invested primarily in stocks, with the investment mix shifting towards bonds as the present value of future labor income declines. We revisit this logic in a dynamic model in which shocks to labor income are correlated with the stock market, and in which Social Security replaces a higher share of income for lower-income individuals. In line with empirical evidence, lower-income individuals in the model experience a higher degree of correlation between labor earnings growth and stock returns. We find that utility-maximizing retirement portfolios can vary greatly across individuals, deviating substantially from the pattern of a target date fund for lower-income individuals. |
| JEL: | G51 H55 J26 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34966 |
| By: | Richiardi, Matteo; van de Ven, Justin; Popova, Daria; Brooks, Natasha |
| Abstract: | This paper describes the integration of labour supply behavioural responses into UKMOD, the UK tax-benefit microsimulation model belonging to the EUROMOD family. Traditional static models quantify only the direct (“morning after†) fiscal and distributional effects of policy reforms, abstracting from behavioural adjustment. We outline a practical framework for extending such models to incorporate indirect effects, with a focus on labour supply responses at both the intensive and extensive margins.After reviewing the evolution of the empirical literature on labour supply elasticities and the distinction between structural and reduced-form approaches, we motivate the adoption of an elasticity-based reduced-form method. While structural random utility models offer theoretically consistent counterfactual analysis, they are computationally demanding and less transparent for routine policy work. By contrast, externally estimated elasticities - widely used by UK institutions - provide a tractable and policy-aligned alternative.We detail the design of the Behavioural Responses (BVR) add-on introduced in UKMOD in 2023. The module computes marginal and average effective tax rates, distinguishes responses to changes in marginal versus average rates, and applies assumed taxable income elasticities to generate post-reform behavioural adjustments. Implementation requires a limited number of simulation loops and preserves transparency and computational efficiency. |
| Date: | 2026–03–04 |
| URL: | https://d.repec.org/n?u=RePEc:ese:cempwp:cempa4-26 |
| By: | Conti, Alice; Di Matteo, Fabio Lokwani; Candeloro, Giulia; Lancisi, Lorenzo; Sacco, Pier Luigi |
| Abstract: | Most economic models of decision-making assume that individuals maintain comprehensive mental representations of possible world states and compute expected utilities across these representations. The cognitive demands of such exhaustive state-space evaluation appear difficult to reconcile with known constraints on working memory, attention, and neural computation, motivating alternative accounts of how humans navigate complex choice environments. This review examines the hypothesis that neural systems supporting narrative processing contribute substantially to real-world decision-making. We synthesize evidence from three converging lines of research: hierarchical temporal processing in the cortex, the integrative functions of the default mode network, and inter-brain synchronization during naturalistic communication. We acknowledge the ongoing debates about the interpretation of these findings, but we argue that the neural architecture supporting narrative comprehension and generation offers cognitive efficiency advantages relevant to decision-making, including dimensionality reduction through causal structuring, integration of emotional and contextual information, and facilitation of social coordination through shared mental models. Rather than claiming that narrative processing constitutes the exclusive mechanism for decision-making, we propose that it represents one important component of a broader cognitive toolkit that also includes heuristic strategies, model-based planning, and habitual responses. We examine how this perspective relates to phenomena in cognitive economics, including context-dependent preferences, framing effects, and the propagation of economic beliefs through populations. By integrating findings from cognitive neuroscience with decision science, we aim to contribute toward a more biologically informed understanding of human choice behavior and identify key questions for future empirical investigation. |
| Date: | 2026–02–28 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:zxcvg_v1 |