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on Utility Models and Prospect Theories |
| By: | Francisco J. André (Department of Economics, Universidad Pablo de Olavide); Laura Riesgo (Department of Economics, Universidad Pablo de Olavide) |
| Abstract: | The practical implementation of the Multiattribute Utility Theory is limited, partly for the lack of operative methods to elicit the parameters of the Multiattribute Utility Function, particularly when this function is not linear. As a consequence, most studies are restricted to linear specifications, which are easier to estimate and to interpret. We propose an indirect method to elicit the parameters of a nonlinear utility function to be compatible with the actual behaviour of decision makers, rather than with their answers to direct surveys. The idea rests on approaching the parameter estimation problem as a dual of the decision problem and making the observed decisions to be compatible with a rational decision making process. |
| Keywords: | Multiple-Criteria Analysis, Multi-Attribute Utility Function, Simulation, Agriculture. |
| JEL: | C61 Q12 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:pab:wpaper:06.02&r=upt |
| By: | Jochen Moebert (Darmstadt University of Technology, Department of Economics) |
| Abstract: | Social network formation models are often compared by their network structures, which satisfy specific equilibrium or welfare properties. Here, we concentrate on welfare criteria and define properties of utility function which are causal for certain network structures. We hope the identification of different properties of utility function will enhance the understanding of the relationship of different network formation models. If this line of research is continued, a kind of engineering of network formation models might arise such that actual social networks can be directly described by appropriate utility functions. |
| Keywords: | social networks, network formation, rival networks, welfare, efficiency |
| JEL: | D60 D85 L14 Z13 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:tud:ddpiec:160&r=upt |
| By: | Nadja Silberhorn; Yasemin Boztug; Lutz Hildebrandt |
| Abstract: | Due to its ability to allow and account for similarities betweenpairs of alternatives, the nested logit model is increasingly used in practical applications. However the fact that there are two different specifications of the nested logit model has not received adequate attention. The utility maximization nested logit (UMNL) model and the non-normalized nested logit (NNNL) model have different properties, influencing the estimation results in a different manner. As the NNNL specification is not consistent with random utility theory (RUT), the UMNL form is preferred. This article introduces distinct specifications of the nested logit model and indicates particularities arising from model estimation. Additionally, it demonstrates the performance ofsimulation studies with the nested logit model. In simulation studies with the nested logit model using NNNL software (e. g. PROC MDC in SAS(c) ), it must be pointed out that the simulation of the utility function´s error terms needs to assume RUT-conformity. But as the NNNL specification is not consistent with RUT, the input parameters cannot be reproduced without imposing restrictions. The effects of using various software packages on the estimation results of a nested logit model are shown on the basis of a simulation study. |
| Keywords: | nested logit model, utility maximization nested logit, non-normalized nested logit, simulation study |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2006-017&r=upt |
| By: | Jochen Moebert (Darmstadt University of Technology, Department of Economics) |
| Abstract: | The mainly used welfare criterion in the social network literature is Bentham´s utilitarian concept. The shortcomings of this concept are well-known. We compare the outcomes of the utilitarian concept with the Nash social welfare function. By using a Taylor approximation we deduce a formula which allows the direct comparison of both concepts. The implications of welfare considerations of important network formation models are evaluated by using the multiplicative concept. We introduce a new symmetric connection model which is related to Nash´s welfare function in the same way as the original model is related to the utilitarian function. Based on the observation that heavy tail distributions like the power law distribution and the Pareto distribution can be explained by multiplicative structures we propose to use multiplicative utility functions in social network models. Furthermore, multiplicative utility and welfare functions together exhibit favorable characteristics both in normative and positive terms. Many empirically observed social networks have structures which are better modelled by multiplicative functions. From the normative perspective, multiplicative functions might be attractive since the Nash product introduces some form of justice. |
| Keywords: | social networks, welfare, efficiency, Nash product, jefficiency, justice |
| JEL: | A13 D11 D23 D61 D63 L14 Z13 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:tud:ddpiec:161&r=upt |
| By: | Toshihiro Ihori (Faculty of Economics, University of Tokyo); Martin C. McGuire (University of California-Irvine) |
| Abstract: | We provide an analysis of odds-improving self-protection for when it yields collective benefits to groups, such as alliances of nations, for whom risks of loss are public bads and prevention of loss is a public good. Our analysis of common risk reduction shows how diminishing returns in risk improvement can be folded into income effects. These income effects then imply that whether protection is inferior or normal depends on the risk aversion characteristics of underlying utility functions, and on the interaction between these, the level of risk, and marginal effectiveness of risk abatement. We demonstrate how public good inferiority is highly likely when the good is "group risk reduction." In fact, we discover a natural or endogenous limit on the size of a group and of the amount of risk controlling outlay it will provide under Nash behavior. We call this limit an "Inferior Goods Barrier" to voluntary risk reduction. For the paradigm case of declining risk aversion, increases in group size/wealth will cause provision of more safety to change from a normal to an inferior good thereby creating such a barrier. |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2006cf402&r=upt |
| By: | Raj Chetty |
| Abstract: | This paper shows that existing evidence on labor supply behavior places an upper bound on risk aversion in the expected utility model. I derive a formula for the coefficient of relative risk aversion (g) in terms of (1) the ratio of the income elasticity of labor supply to the wage elasticity and (2) the degree of complementarity between consumption and labor. I bound the degree of complementarity using data on consumption choices when labor supply varies randomly across states. Using labor supply elasticity estimates from thirty-three studies, I find a mean estimate of g = 1. I then show that generating g > 2 would require that wage increases cause sharper reductions in labor supply than estimated in any of the studies. |
| JEL: | D80 J20 J60 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12067&r=upt |
| By: | Osamu Keyda (Kumamoto Gakuen University) |
| Abstract: | This paper presents an analysis of market equilibrium under the circumstances withseveral discrete economic conditions by using pure exchange economy model. First,as preliminary analysis, it will show the ‘temporal’ market equilibrium under a givendistribution of population over the dierent circumstances in section 2. Next, in section3 our study will prove the existence of market equilibrium in the case that economicagents can choose their economic conditions freely for their utility maximization. Finallyour research tries to approximate our model to the residential location model throughthe specified assumptions on initial endowments and agent’s preference, and it derivessome properties of equilibrium consumptions and prices. |
| Keywords: | equilibrium, local goods, excess utility |
| JEL: | D51 R13 R20 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2006-02&r=upt |
| By: | Chakravarty Sujoy; Roy Jaideep |
| Abstract: | We use a multiple price list (MPL) method to elicit attitudes to risky and ambiguous prospects. In particular we wish to investigate if there are differences in agent behaviour under uncertainty over gain amounts vis a vis uncertainty over loss amounts. On an aggregate level, we find that (i) in the domain of risk, subjects are risk averse over both gain and loss lotteries with the degree of risk aversion being lower for losses than gains, (ii) subjects are ambiguity averse over ambiguous prospects that involve gains, but that they are mildly ambiguity seeking over such prospects that involve loss and (iii) attitudes toward risk and ambiguity are positively correlated in the domain of gains and are independent of each other in the domain of losses. These behavioural observations are statically significant using both parametric as well as non-parametric tests. Further analysis shows that at an individual level, (a) in the domain of risk, there is a high incidence of a reflection effect across gains and losses though the subjects’ behaviour is bimodal, that is, many are risk averse in gains and risk seeking in losses while many others are risk seeking in gains and risk averse in losses, while (b) in the domain of ambiguity, there is also a high incidence of a reflection effect although almost all such cases exhibit ambiguity aversion in gains and ambiguity seeking in losses. |
| Keywords: | Risk, Smooth Ambiguity, Gains, Losses. |
| JEL: | C9 |
| Date: | 2006–02–27 |
| URL: | http://d.repec.org/n?u=RePEc:iim:iimawp:2006-02-06&r=upt |
| By: | Anders Holm (Department of Sociology, University of Copenhagen); Mads Meier Jæger (The Danish National Institute of Social Research) |
| Abstract: | The theory of Relative Risk Aversion (RRA) claims that educational decision-making is ultimately motivated by the individual’s desire to avoid downward social class mobility, and that this desire is stronger than the desire to pursue upward mobility. This paper implements a dynamic programming model which tests the central behavioral assumption in the RRA theory stating that (1) individuals are forward-looking when choosing education and (2) that the RRA mechanism comprises an important component in the educational decision-making process. Using data from the Danish Youth Longitudinal Study, we find strong evidence of RRA in educational decision-making over and above the effect of traditional social background variables. |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuieca:2006_04&r=upt |
| By: | Holger Bonin (IZA Bonn); Amelie Constant (IZA Bonn); Konstantinos Tatsiramos (IZA Bonn); Klaus F. Zimmermann (Bonn University, IZA Bonn and DIW Berlin) |
| Abstract: | This paper questions the perceived wisdom that migrants are more risk-loving than the native population. We employ a new large German survey of direct individual risk measures to find that first-generation migrants have lower risk attitudes than natives, which only equalize in the second generation. |
| Keywords: | risk attitudes, ethnicity, native-migrant differences, gender differences, second-generation effects |
| JEL: | D1 D81 F22 J15 J16 J31 J62 J82 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp1999&r=upt |