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on Utility Models and Prospect Theory |
| By: | Bilbiie, F. O.; Hanks, F.; Lavender, S. |
| Abstract: | Complementarity between consumption and work is essential for heterogeneous-agent models' ability to generate realistic multiplier effects from aggregate demand shocks, while avoiding puzzling predictions. We show how parameterizing complementarity - in the spirit of Frisch's utility acceleration"- separately from income effects is necessary to achieve both. HANK models equipped with such complementarity deliver plausible fiscal multipliers and simultaneously resolve two key challenges in the literature: a "trilemma" of matching marginal propensities to earn (MPEs) and to consume (MPCs), and a Catch-22 "dilemmac of resolving the forward guidance puzzle. We establish these results analytically in a tractable HANK framework and confirm them in a calibrated quantitative HANK model. Standard utility functions, however, constrain either complementarity or income effects - or both - thereby forcing multipliers to depend exclusively on one or the other. We introduce two flexible parametric forms that allow arbitrary, independent calibration of complementarity and income effects: a quasi-separable "GHH-CRRA" utility and a "CCRRA" (constant complementarity and relative risk aversion) specification. |
| Keywords: | Consumption-Hours Complementarity, HANK, Income and Wealth Effects, Fiscal Multipliers, Utility |
| JEL: | D11 E32 E52 E62 |
| Date: | 2025–10–31 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2573 |
| By: | Yue Cao; Zongxia Liang; Sheng Wang; Xiang Yu |
| Abstract: | This paper investigates a time-inconsistent portfolio selection problem in the incomplete mar ket model, integrating expected utility maximization with risk control. The objective functional balances the expected utility and variance on log returns, giving rise to time inconsistency and motivating the search of a time-consistent equilibrium strategy. We characterize the equilibrium via a coupled quadratic backward stochastic differential equation (BSDE) system and establish the existence theory in two special cases: (i) two Brownian motions driven the price dynamics and the factor process are independent with $\rho = 0$; (ii) the trading strategy is constrained to be bounded. For the general case with correlation coefficient $\rho \neq 0$, we introduce the notion of an approximate time-consistent equilibrium. By employing the solution structure from the equilibrium in the case $\rho = 0$, we can construct an approximate time-consistent equilibrium in the general case with an error of order $O(\rho^2)$. Numerical examples and financial insights based on deep learning algorithms are also presented. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2511.05861 |
| By: | Carmelo Rodríguez à lvarez (Instituto Complutense de Análisis Económico (ICAE), Universidad Complutense de Madrid (Spain)) |
| Abstract: | We consider strategy-proof social choice correspondences (SCCs) –mappings from preference profiles to sets of alternatives– when individuals are endowed with single-peaked preferences over alternatives. We interpret the selected sets of alternatives as the basis for lotteries that determine the final social choice, and consider that agents’ preferences over sets are consistent with Expected Utility Theory and Bayesian updating from an initial probability assessment over the full set of alternatives. We exploit the relation between SCCs and probabilistic decision schemes –mappings from preference profiles to lotteries over alternatives–, to characterize the family of SCCs that satisfy strategy-proofness and unanimity for arbitrary initial probability assessments. We extend the analysis to multi-dimensional convex spaces of alternatives under the uniform initial probability assessment. |
| Keywords: | Strategy-Proofness; Single-Peaked Preferences; Social Choice Correspondences. |
| JEL: | C71 D71 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ucm:doicae:2506 |
| By: | Yixin Tao; Weiqiang Zheng |
| Abstract: | The Fisher market equilibrium for private goods and the Lindahl equilibrium for public goods are classic and fundamental solution concepts for market equilibria. While Fisher market equilibria have been well-studied, the theoretical foundations for Lindahl equilibria remain substantially underdeveloped. In this work, we propose a unified duality framework for market equilibria. We show that Lindahl equilibria of a public goods market correspond to Fisher market equilibria in a dual Fisher market with dual utilities, and vice versa. The dual utility is based on the indirect utility, and the correspondence between the two equilibria works by exchanging the roles of allocations and prices. Using the duality framework, we address the gaps concerning the computation and dynamics for Lindahl equilibria and obtain new insights and developments for Fisher market equilibria. First, we leverage this duality to analyze welfare properties of Lindahl equilibria. For concave homogeneous utilities, we prove that a Lindahl equilibrium maximizes Nash Social Welfare (NSW). For concave non-homogeneous utilities, we show that a Lindahl equilibrium achieves $(1/e)^{1/e}$ approximation to the optimal NSW, and the approximation ratio is tight. Second, we apply the duality framework to market dynamics, including proportional response dynamics (PRD) and t\^atonnement. We obtain new market dynamics for the Lindahl equilibria from market dynamics in the dual Fisher market. We also use duality to extend PRD to markets with total complements utilities, the dual class of gross substitutes utilities. Finally, we apply the duality framework to markets with chores. We propose a program for private chores for general convex homogeneous disutilities that avoids the "poles" issue, whose KKT points correspond to Fisher market equilibria. We also initiate the study of the Lindahl equilibrium for public chores. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2511.04572 |
| By: | Allen Vong |
| Abstract: | I study how a firm uses mediated communication with a worker and its clients to maximize worker performance over time. I find that optimal mediation involves occasional randomizations, secret from clients, between two continuations. In one, the worker cuts corner and then retains his current continuation utility. In the other, the worker exerts effort and then receives the highest continuation equilibrium utility less a minimal penalty for underperformance. These randomizations eventually disappear, replaced by canonical carrot-and-stick incentives. Optimal mediation Pareto-improves upon no mediation for both the worker and the average client if and only if the worker is sufficiently patient. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2511.02436 |
| By: | Daniele De luca |
| Abstract: | This paper introduces a geometric framework for analyzing power relations in games, independent of their strategic form. We define a canonical preference space where each player's relational stance is a normalized vector. This model eliminates the arbitrariness of selecting utility functions, a limitation of recent approaches. We show how classical concepts-bargaining power, dependence, reciprocity-are recovered and generalized within this space. The analysis proceeds in two steps: projecting a game's payoffs and outcomes onto the space, and then reducing the resulting landscape using key metrics. These include a Center of Mass (CoM) and structural indices for Hierarchy (H) and Reciprocity (R). Applications to canonical games (Prisoner's Dilemma, Battle of the Sexes) and economic models (Cournot duopoly) demonstrate that the framework reveals underlying structural similarities across different strategic settings and provides a quantitative characterization of relational dynamics. It thus bridges cooperative and non-cooperative game theory by conceptualizing power as a structural property of the mapping from preferences to equilibria. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2511.07287 |
| By: | Guojiang Shao; Zuo Quan Xu; Qi Zhang |
| Abstract: | We investigate a portfolio selection problem involving multi competitive agents, each exhibiting mean-variance preferences. Unlike classical models, each agent's utility is determined by their relative wealth compared to the average wealth of all agents, introducing a competitive dynamic into the optimization framework. To address this game-theoretic problem, we first reformulate the mean-variance criterion as a constrained, non-homogeneous stochastic linear-quadratic control problem and derive the corresponding optimal feedback strategies. The existence of Nash equilibria is shown to depend on the well-posedness of a complex, coupled system of equations. Employing decoupling techniques, we reduce the well-posedness analysis to the solvability of a novel class of multi-dimensional linear backward stochastic differential equations (BSDEs). We solve a new type of nonlinear BSDEs (including the above linear one as a special case) using fixed-point theory. Depending on the interplay between market and competition parameters, three distinct scenarios arise: (i) the existence of a unique Nash equilibrium, (ii) the absence of any Nash equilibrium, and (iii) the existence of infinitely many Nash equilibria. These scenarios are rigorously characterized and discussed in detail. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2511.05270 |
| By: | Lars A. Lochstoer; Stig R. H. Lundeby; Zhaneta K. Tancheva |
| Abstract: | Recent evidence in the psychology literature suggests that individuals' degree of present bias varies with the state of nature and increases under stress. Consistent with this notion, we document, using survey data on individuals’ expected and realized consumption growth, that agents indeed tend to overconsume relative to their expectations and that the degree of such overconsumption is higher in bad times. We analyze the asset pricing implications of this bias and show that even if they control a small fraction of wealth, investors with time-varying degree of present bias cause substantial, priced discount rate risks that have first-order impact on the level and time-variation of asset risk premiums. The mechanism is distinct from that of models with time-varying preference parameters and that of models with biased expectations about aggregate outcomes. |
| JEL: | G12 G41 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34453 |
| By: | Yukihiko Funaki; Yukio Koriyama; Satoshi Nakada; Yuki Tamura |
| Abstract: | We study efficient, linear, and symmetric (ELS) values, a central family of allocation rules for cooperative games with transferable-utility (TU-games) that includes the Shapley value, the CIS value, and the ENSC value. We first show that every ELS value can be written as the Shapley value of a suitably transformed TU-game. We then introduce three types of invariance axioms for fixed player populations. The first type consists of composition axioms, and the second type is active-player consistency. Each of these two types yields a characterization of a subclass of the ELS values that contains the family of least-square values. Finally, the third type is nullified-game consistency: we define three such axioms, and each axiom yields a characterization of one of the Shapley, CIS, and ENSC values. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2511.04996 |
| By: | Eduardo Dávila; Cecilia Parlatore; Ansgar Walther |
| Abstract: | This paper develops probability pricing, extending cash flow pricing to quantify the willingness-to-pay for changes in probabilities. We show that the value of any marginal change in probabilities can be expressed as a standard asset-pricing formula with hypothetical cash flows derived from changes in the survival function. This equivalence between probability and cash flow valuation allows us to construct hedging strategies and systematically decompose individual and aggregate willingness-to-pay. Four applications examine the valuation of changes in the distribution of aggregate consumption, the efficiency effects of varying performance precision in principal-agent problems, and the welfare implications of public and private information. |
| JEL: | D81 G12 G14 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34448 |
| By: | Hayoung So |
| Abstract: | The recent surge in Jeonse fraud has emerged not merely as isolated tenant damage but as a structural shock to South Korea’s rental housing market. In particular, the concentrated occurrence and public exposure of fraud cases in 2022 significantly increased tenants’ risk aversion, prompting the need for an empirical examination of how rising risk premiums affect the deposit-rent conversion rate. While previous studies have focused on landlord-side factors such as interest rates, price-to-deposit ratios, and landlords’ returns, there has been limited discussion on how market shocks influence tenant behavior and sentiment. This study addresses that gap by estimating the deposit-rent conversion rate using a machine learning model and conducting exploratory data analysis. The results show a notable upward trend in the conversion rate beginning in the third quarter of 2022, coinciding with heightened media attention to the fraud cases. However, no significant difference was observed between known Jeonse fraud hotspots and other regions, suggesting that the impact was widespread across the market. Higher deposit-rent conversion rates were also observed in central areas with strong expectations of future price appreciation, aligning with prior research that views Jeonse deposits as a form of leveraged investment rather than simple security deposit. Building on these findings, a statistical analysis incorporating the volume of news articles on Jeonse fraud was conducted. The results reveal that changes in the conversion rate are closely associated with increases in tenant risk premiums, beyond what can be explained by interest rates or price-deposit ratios alone. As social awareness of Jeonse fraud expands, tenant’s anxiety over Jeonse deposit recovery intensifies, leading to a decline in Jeonse demand and a rising preference for monthly rent contracts. These findings suggest that Jeonse fraud acts as a structural force reshaping lease contract patterns and the broader rental market. The study contributes to the literature by highlighting tenant-side risk considerations and conducting a micro-spatial analysis at the legal district level. |
| Keywords: | Deposit-Rent Conversion Rate; Housing Market Structural Change; Jeonse Fraud; Risk Premium |
| JEL: | R3 |
| Date: | 2025–01–01 |
| URL: | https://d.repec.org/n?u=RePEc:arz:wpaper:eres2025_295 |