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on Utility Models and Prospect Theory |
| By: | Peter Duersch (University of Heidelberg, Department of Economics); Maros Servátka (University of Canterbury, Department of Economics) |
| Abstract: | We conduct a prisoner’s dilemma experiment with a punishment/reward stage, where punishments and rewards are risky. This is compared with a risk free treatment. We find that subjects do not change their behavior in the face of risky outcomes. Additionally, we measure risk attitude and the emotions of subjects. While we find a strong influence of emotions, individual risk aversion has no effect on the decision to punish or reward. This is good news for lab experiments who abstract from risky outcomes. From the perspective of social preferences, our results provide evidence for risk neutral inclusion of other player’s payoffs in the decisionmaker’s utility function. |
| Keywords: | Prisoner’s dilemma, risk, punishment, reward, emotions, experiment |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0451&r=upt |
| By: | Dannenberg, Astrid; Riechmann, Thomas; Sturm, Bodo; Vogt, Carsten |
| Abstract: | We present a simple two-steps procedure for a within-subject test of the inequity aversion model of Fehr and Schmidt (1999). In the first step, subjects played modified ultimatum and dictator games and were classified according to their preferences. In the second step, subjects with specific preferences according to the Fehr and Schmidt model were matched into pairs and interacted with each other in a standard public good game and a public good game with punishment possibility. Our results show that the specific composition of groups significantly influences the subjects’ performance in the public good games. We identify the aversion against advantageous inequity and the information about the coplayer’s type as the main influencing factors for the behavior of subjects. |
| Keywords: | individual preferences, inequity aversion, experimental economics, public goods |
| JEL: | C91 C92 H41 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:6088&r=upt |
| By: | Ronald J. Baker II (Millersville University of Pennsylvania); Susan K. Laury (Georgia State University); Arlington W. Williams (Indiana University Bloomington) |
| Abstract: | Lottery-choice experiments are conducted to compare risk preferences revealed by three-person groups versus isolated individuals. A lottery-choice experiment consists of a menu of paired lottery choices structured so that the crossover point from a low-risk to a high-risk lottery can be used to infer the degree of risk aversion. A between-subjects experiment of group versus individual lottery-choice decisions reveal that there is not a significant difference in the average crossover point, but lottery choices are affected by a significant interaction between subject composition (individual or group) and lottery winning percentage. Also, a three-phased individual-group-individual sequenced experiment reveals that the count of safe lotteries chosen by groups is, on average, significantly greater than the mean of the individual members. Finally, making a phase-two group decision has a significant impact on subsequent phase-three individual decisions relative to the initial phase-one (individual) decisions. |
| Keywords: | lab experiments, risk preferences, group decisions |
| JEL: | C91 C92 D80 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2007018&r=upt |
| By: | Oliver Hart; John Moore |
| Abstract: | We argue that a contract provides a reference point for a trading relationship: more precisely, for parties’ feelings of entitlement. A party’s ex post performance depends on whether he gets what he is entitled to relative to outcomes permitted by the contract. A party who is shortchanged shades on performance. A flexible contract allows parties to adjust their outcome to uncertainty, but causes inefficient shading. Our analysis provides a basis for long-term contracts in the absence of noncontractible investments, and elucidates why “employment” contracts, which fix wage in advance and allow the employer to choose the task, can be optimal. |
| URL: | http://d.repec.org/n?u=RePEc:edn:esedps:170&r=upt |
| By: | Stefano DellaVigna |
| Abstract: | The research in Psychology and Economics (a.k.a. Behavioral Economics) suggests that individuals deviate from the standard model in three respects: (i) non-standard preferences; (ii) non-standard beliefs; and (iii) non-standard decision-making. In this paper, I survey the empirical evidence from the field on these three classes of deviations. The evidence covers a number of applications, from consumption to finance, from crime to voting, from giving to labor supply. In the class of non-standard preferences, I discuss time preferences (self-control problems), risk preferences (reference dependence), and social preferences. On non-standard beliefs, I present evidence on overconfidence, on the law of small numbers, and on projection bias. Regarding non-standard decision-making, I cover limited attention, menu effects, persuasion and social pressure, and emotions. I also present evidence on how rational actors -- firms, employers, CEOs, investors, and politicians -- respond to the non-standard behavior described in the survey. I then summarize five common empirical methodologies used in Psychology and Economics. Finally, I briefly discuss under what conditions experience and market interactions limit the impact of the non-standard features. |
| JEL: | A1 C91 C93 D00 D64 D91 G1 M3 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13420&r=upt |
| By: | C. Mirjam van Praag (University of Amsterdam, Tinbergen Institute, Max Planck Institute of Economics Jena and IZA); Peter H. Versloot (University of Amsterdam and Tinbergen Institute) |
| Abstract: | This paper examines to what extent recent empirical evidence can collectively and systematically substantiate the claim that entrepreneurship has important economic value. Hence, a systematic review is provided that answers the question: What is the contribution of entrepreneurs to the economy in comparison to non-entrepreneurs? We study the relative contribution of entrepreneurs to the economy based on four measures that have most widely been studied empirically. Hence, we answer the question: What is the contribution of entrepreneurs to (i) employment generation and dynamics, (ii) innovation, and (iii) productivity and growth, relative to the contributions of the entrepreneurs’ counterparts, i.e. the ‘control group’? A fourth type of contribution studied is the role of entrepreneurship in increasing individuals’ utility levels. Based on 57 recent studies of high quality that contain 87 relevant separate analyses, we conclude that entrepreneurs have a very important - but specific - function in the economy. They engender relatively much employment creation, productivity growth and produce and commercialize high quality innovations. They are more satisfied than employees. More importantly, recent studies show that entrepreneurial firms produce important spillovers that affect regional employment growth rates of all companies in the region in the long run. However, the counterparts cannot be missed either as they account for a relatively high value of GDP, a less volatile and more secure labor market, higher paid jobs and a greater number of innovations and they have a more active role in the adoption of innovations. |
| Keywords: | entrepreneur, entrepreneurship, self-employment, productivity, economic development, growth, employment, innovation, patents, R&D, utility, remuneration, income |
| JEL: | D24 D31 E23 E24 J21 J28 J31 L26 M13 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3014&r=upt |
| By: | Carlos E. da Costa; João Victor Issler (EPGE/FGV); Paulo Matos |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:epgewp:649&r=upt |
| By: | Weichun Chen; Merwan Engineer; Ian King |
| Abstract: | We extend Diamond’s (1965) OLG model to allow agents to choose whether to participate in the second period of life. The valuation of early exit (x) is a key parameter. We characterize competitive equilibria, efficient allocations, and predictions for income and life expectancy over time. We find that, with logarithmic utility, for any value of x, there is a range of initial values of the capital stock for which some agents would prefer to exit in equilibrium. The shape of the transition function and the number of steady state equilibria depend crucially on the value of capital’s share of income. |
| Keywords: | ndogenous longevity, overlapping generations, growth |
| JEL: | D91 O1 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:mlb:wpaper:1002&r=upt |