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on Utility Models and Prospect Theory |
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Issue of 2017‒04‒02
sixteen papers chosen by |
| By: | Elena Stolyarova; Hélène Le Cadre, MINES ParisTech, PSL Research University, Centre for Applied Mathematics; Dominique Osso, EDF R&D, ENERgie dans les BAtiments et les Territoires; Benoit Allibe |
| Abstract: | this paper, we use a discrete choice experiment on space heating for both detached houses and apartments in France. In our choice experiment, we asked 1,820 respondents, both owners and tenants, to imagine that their current space heating system had broken down and that they had to choose a new one to replace it. A multinomial logit model was used to analyze the households preferences and willingness to pay for various space heating system attributes. We found that in general households prefer renewable sources and systems, but avoid wood. Preferences for familiar technologies have a considerable impact on the probabilities of choice and could represent a significant obstacle to the development of energy-ecient equipment. Willingness to pay for attributes that control energy consumption depends on thermal comfort preferences. The more cold-sensitive the household, the more willing it is to invest to renewable energy sources and to set temperature management. At the first time we modeling the household utility function derived from thermal comfort (annual space heating service) which is a strictly increasing and concave function of indoor temperature. The households can obtain additional utility from energy efficiency after the dwelling renovation. This renovation allows not only to reach the thermal comfort at least cost, but also to enjoy the advantages of new installation as a brand, type of heating system, internal or external solid wall insulation, type of heat emitters, energy source (natural gas, electricity, wood, etc.), control system to manage set temperature of space heating, etc. The utility, derived from retrofit works, is a function of purchase attributes and constant over time. The households choose the level of indoor temperature and decide to invest in retrofit works in order to maximize their utility, subject to available income which is sufficient to cover energy bills. We use annual degree heating days, function of indoor temperature, to calculate energy bills. Household and firm are supposed to be risk averse. In order to analyze household preferences for energy efficiency works, we adapt the econometric approach based on the Random Utility Model (RUM), also known as discrete choice analysis. The random utility function is decomposed in two parts. One is observable by the researcher and can be estimated, the other one is considered to be random. The RUM allows us to obtain the probability to invest in different retrofit works. Data At the beginning of January 2015 a sample of 2000 respondents is collected by internet from a panel of 600,000 French Households. The survey consists of two parts (revealed preferences data and two choice experiments) and contains questions about socio-economic and demographic information, dwelling conditions, energy attitudes, space heating system and thermal comfort. We uses a balancing orthogonal fractional factorial design with main effects only to design the choice experiments. In the first choice experiment, the respondent must take a choice between three offers of space heating systems in order to replace the old system which is broken down. The offers are characterized by the following attributes: investment cost, expected energy-savings potential, energy used, type of space heating system, guarantee period, control system to manage set temperature, financial grant and bank loan. In the second choice experiment, we propose to improve energy efficiency of respondent’s dwelling. The respondent must choose between three offers: install new space heating system, insulate walls and roof, to do both. Or the respondent can decide do not invest in retrofits works. The offers’ attributes are the same as in first choice situation. We expect that the study will provide us the information about different thermal comfort profile of French households (most preferred indoor temperature, causes of discomfort). The choices situations will used to find the willingness to pay and reservation prices for energy efficiency works. The program of contract between household and firm will allow us to understand French renovation market and propose some solutions to increase the energy efficiency works, the market share of renewable and environmental friendliness equipment. |
| Keywords: | France, Energy and environmental policy, Microsimulation models |
| Date: | 2015–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:008007:8579&r=upt |
| By: | Tomas Miklanek |
| Abstract: | This paper examines endogenous decisions to acquire useful information. My experimental design tries to test predictions of ego-utility theories and other relevant theories about the decision-making process of agents in the environment with costless signals. Only slightly more than half of the subjects acquired an optimal number of the signals for payoff maximization. The results suggest that for the subjects making sub-optimal decisions, aversion to cognitive dissonance is the prevalent channel. Contrary to this, I find much less support for the ego-utility theory and theory of information ignorance in my setting. The availability of information alone does not automatically lead to an improvement in decisions. |
| Keywords: | information acquisition; experiment; overconfidence; |
| JEL: | C91 D03 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp582&r=upt |
| By: | Tomas Miklanek |
| Abstract: | This study introduces a theoretical model of inequality aversion which can also be used in an environment with information asymmetries. The model is based on the non-paternalistic approach where, the own utility function incorporates the utility of other people as perceived by a decision maker. Moreover it allows extensions for other motives which may result in pro-social behavior. I extend the model by adding shame aversion as an additional driver for apparently altruistic behavior. Threat of shame is induced by different levels of exposure of either own actions or identity to the third party observers. I also experimentally test predictions of the model using a very simple environment of a dictator’s game. The experimental design aims to remove additional confounding behavioral effects present in the previous literature. The results suggest that even a very small exposure results in significantly higher amounts sent to recipients. The analysis also shows that the agents, who believe that they can conceal their own actions in front of the less informed counterpart, exploit this information asymmetry for their monetary benefit. |
| Keywords: | shame; dictator game; anonymity; experiment; |
| JEL: | C91 D03 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp581&r=upt |
| By: | Michela Faccioli (The James Hutton Institute, Social, Economic and Geographical Sciences Group); Laure Kuhfuss (School of Geography and Sustainable Development, University of St. Andrews); Mikolaj Czajkowski (University of Warsaw, Department of Economics) |
| Abstract: | The outcome of a conservation policy is often subject to uncertainty. In stated preference valuation, there is increasing recognition that uncertainty affects preferences for environmental policies. However, there is also poor understanding regarding people’s perception of uncertainty per se and risk attitude. To shed more light on this , we designed a discrete choice experiment and compared preferences for environmental outcomes under climate change across two split samples, each confronted with a scenario where environmental outcomes are presented as either certain or uncertain (i.e. probabilistically) but displaying the same expected results. We fi nd that, for an equal expected outcome, preferences vary between the certain and the uncertain treatment. These results indicate that risk attitudes impact stated preferences for conservation policies under uncertainty and reinforce the idea that uncertainty should be included in stated preference studies to provide more accurate and policy relevant results . Interestingly, we additionally find that risk attitudes appear to be both context- and individual-specific– the effect of uncertainty depends on the magnitude and direction of change of the environmental good and on individual’s socio-demographic characteristics. |
| Keywords: | Stated preference valuation, uncertainty, risk attitude, climate change, conservation |
| JEL: | D6 D81 Q20 Q51 Q54 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:sss:wpaper:2017-06&r=upt |
| By: | Kollmann, Robert |
| Abstract: | The business cycles of advanced economies are synchronized. Standard macro models fail to explain that fact. This paper presents a simple model of a two-country, two-traded good, complete-financial-markets world in which country-specific productivity shocks generate business cycles that are highly correlated internationally. The model assumes recursive intertemporal preferences (Epstein-Zin-Weil), and a muted response of labor hours to household wealth changes (due to Greenwood-Hercowitz-Huffman period utility and demand determined employment under rigid wages). Recursive intertemporal preferences magnify the terms of trade response to country specific shocks. Hence, a productivity (and GDP) increase in a given country triggers a strong improvement of the foreign country's terms of trade, which raises foreign labor demand. With a muted labor wealth effect, foreign labor and GDP rise, i.e. domestic and foreign real activity comove positively. |
| Keywords: | international business cycle synchronization; real exchange rate; recursive preferences; terms of trade; wealth effect on labor supply |
| JEL: | F31 F32 F36 F41 F43 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11911&r=upt |
| By: | Tim Jaekel (National Research University Higher School of Economics); Georgiy Borshchevskiy (. Russian Presidential Academy of National Economy and Public Administration) |
| Abstract: | Augmenting behavioral public administration to occupational intention research we investigate the link between three types of motivation, and the intention of students to work in civil service after graduation. We make detailed observations of the self-reported job preferences of 2nd public administration undergraduates in two prestigious universities in Moscow, Russian Federation. We report that federal civil service is the top destination for Russian PA undergraduates. We also report that working in federal civil service by far triumphs over regional public administration in terms of self-reported occupational intention. We also make in-depth observations of the expected utility underlying students’ job preferences. We use these observations to propose a general model of civil service job intention. The model posits that the intention to work in civil service after graduation results from two major sources: the perceived expectation from parents with a civil service background, and the expected utility from four benefits of public sector employment. We empirically demonstrate that public service motivation is positively correlated with the intention to work in civil service after graduation |
| Keywords: | Behavioral Public Administration, Occupational preference formation, civil service job intention, public service motivation, Russia |
| JEL: | D73 H83 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:hig:wpaper:07/psp/2017&r=upt |
| By: | Simon Schopohl (EDEEM - Université Paris 1 - EDEEM - European Doctorate in Economics Erasmus Mundus, Universität Bielefeld (GERMANY), CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, UCL - Université Catholique de Louvain) |
| Abstract: | We consider a Sender-Receiver game in which the Sender can choose between sending a cheap-talk message, which is costless, but also not verified and a costly verified message. While the Sender knows the true state of the world, the Receiver does not have this information, but has to choose an action depending on the message he receives. The action then yields to some utility for Sender and Receiver. We only make a few assumptions about the utility functions of both players, so situations may arise where the Sender's preferences are such that she sends a message trying to convince the Receiver about a certain state of the world, which is not the true one. In a finite setting we state conditons for full revelation, i.e. when the Receiver always learns the truth. Furthermore we describe the player's behavior if only partial revelation is possible. For a continuous setting we show that additional conditions have to hold and that these do not hold for “smooth” preferences and utility, e.g. in the classic example of quadratic loss utilities. |
| Keywords: | cheap-talk,communicaation,costly disclosure,full revelation,increasing differences,Sender-Receiver game,verifiable information |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-01490688&r=upt |
| By: | Franz Dietrich (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Christian List (LSE - London School of Economics and Political Science) |
| Abstract: | How can several individuals' probability assignments to some events be aggregated into a collective probability assignment? Classic results on this problem assume that the set of relevant events – the agenda – is a-algebra and is thus closed under disjunction (union) and conjunction (intersection). We drop this demanding assumption and explore probabilistic opinion pooling on general agendas. One might be interested in the probability of rain and that of an interest-rate increase, but not in the probability of rain or an interest-rate increase. We characterize linear pooling and neutral pooling for general agendas, with classic results as special cases for agendas that are algebras. As an illustrative application, we also consider probabilistic preference aggregation. Finally, we unify our results with existing results on binary judgment aggregation and Arrovian preference aggregation. We show that the same kinds of axioms (independence and consensus preservation) have radically different implications for different aggregation problems: linearity for probability aggregation and dictatorship for binary judgment or preference aggregation. |
| Keywords: | agenda characterizations, vague/fuzzy preferences,Probabilistic opinion pooling, judgment aggregation, subjective probability, probabilistic preferences, a unifed perspective on aggregation |
| Date: | 2017–03–14 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-01485792&r=upt |
| By: | Lugilde, Alba; Bande, Roberto; Riveiro, Dolores |
| Abstract: | Standard macroeconomic models show that uncertainty plays a significant role in consumption and saving decisions under rather mild conditions, namely the convexity of the marginal utility of consumption. Increased uncertainty generates a positive extra saving, the so-called “precautionary saving”. Although this hypothesis has been tested by a large number of authors, both at macro and micro level, the empirical results are not conclusive, and the main conclusion than can be drawn is that there is neither consensus on the intensity of that motive for saving, nor on the most appropriate measure of uncertainty. This paper provides a comprehensive review of the literature (both theoretical and empirical) and discusses the main controversial issues and the different approaches followed by the studies addressing empirically the test of precautionary saving. |
| Keywords: | precautionary saving, Euler equation, preferences types, empirical puzzles, uncertainty measures |
| JEL: | D11 D14 E21 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:77511&r=upt |
| By: | OGAWA Eiji; MUTO Makoto |
| Abstract: | The U.S. dollar has maintained its position as the key currency in the global economy even after the euro was introduced to some states of the European Union (EU) in 1999. This is evidence of inertia of the U.S. dollar as the key currency. Our previous study (Ogawa and Muto (2016)) conducted empirical analysis to investigate the effects of several events on the inertia of the U.S. dollar. This paper focuses on the effects of the introduction of the euro and the global financial crisis on the contribution of the Japanese yen to utility. The introduction of the euro significantly decreased the contribution of the Japanese yen to utility as well as that of the Swiss franc. It explains the finding that the introduction of the euro increased the contribution of the euro to utility while the contribution of the U.S. dollar to utility was unchanged. The contribution of the Japanese yen to utility has significantly decreased while the global financial crisis occurred. The Japanese yen has a declining trend in terms of its contribution to utility both before and after the introduction of the euro and the global financial crisis. |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:17018&r=upt |
| By: | Kim, Wongi (Korea Institute for International Economic Policy) |
| Abstract: | In this paper, I empirically examine the effects of uncertainty about government spending policy on economic activity using U.S. time series data. To this end, I constructed government spending policy uncertainty indexes and estimate proxy SVAR model. Proxy SVAR model with constructed indexes shows that an increase in government spending policy uncertainty has negative, sizable, and prolonged effects on economic activity. Moreover, the results imply that the commonly adopted recursive SVAR model in literature on policy uncertainty systematically underestimates the adverse effect of government spending policy uncertainty because of the endogeneity issue. One policy suggestion based on the empirical finding is clear announcement of future government spending path. |
| Keywords: | Policy Uncertainty; Government Spending Policy Uncertainty Index; Government Spending Policy Uncertainty Shock; Proxy SVAR |
| JEL: | C32 E32 E62 |
| Date: | 2016–12–16 |
| URL: | http://d.repec.org/n?u=RePEc:ris:kiepwp:2016_010&r=upt |
| By: | Giuseppe Ciccarone; Francesco Giuli; Enrico Marchetti |
| Abstract: | In this paper we present a novel channel through which the volatility of the monetary/financial sector affects the instability of the real macroeconomic variables originated by self-fulfilling market sentiments. To this aim, we insert some elements of Prospect Theory in the preferences of agents living in an overlapping generations economy where consumers’ heterogeneity and firms’ imperfect information on the level of aggregate demand allow market sentiments to affect the equilibrium path of the economy. In this environment, greater heterogeneity in the household’s narrow framing parameter favour the emergence of self-fulfilling equilibria by exacerbating the coordination problem generated by a pair-wise matching process in the labor market. Furthermore, higher volatility of the money market, by increasing the effect of Prospect Theory on households’ choices, makes the signal upon which firms form their demand schedules noisier; this, in its turn, generates greater variability in market sentiments and hence in real economic activity. |
| Keywords: | Prospect theory; Self-fulfilling equilibria; Sentiments; Behavioral macroeconomics. |
| JEL: | D84 E03 E32 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:rtr:wpaper:0216&r=upt |
| By: | Yongbin Zhu; Yajuan Shi; Zheng Wang |
| Abstract: | Industrial structure adjustment is one of major routes to upgrading the industries and reducing the carbon emissions. Where the industrial structure will evolve that performs the best for the well-being of the social members, and how the energy consumption will change due to the industrial structure change is our concern here. we built a Multi-sector Inter-temporal Dynamic Optimization (MIDO) model by combining the Ramsey-type neo-classical optimal growth model with the general equilibrium model, where the foresight property of consumers and the input-output relationship of each sector are considered. In the optimization objective, we extended the conventional social utility of aggregated consumption in Ramsey model by summing up a weighed utility from consuming goods/services of each sector. The weight in utility function refers to the consuming preference of each sector. Furthermore, the simulation scenarios are built on the presumption that the consuming preference pattern might change with its development stage. So we assumed one scenario follows the present preference of China and three alternative scenarios based on the consuming preference of US, EU and Japan, to study the consumer preference oriented industrial structure evolution for China and the according energy demand trends in each scenario. Our simulation can give us a detailed trend of all economic variables, such as the GDP, output, energy demand, consumption, investment and so forth of each sector during the whole planning period. The preliminary results indicate that the share of Agriculture as well as the Food & Clothes sectors will shrink, while the Other Services sector sees its share enlarging under all four preference patterns. In the Scen-China scenario, if the preference pattern of Chinese consumers applies to Chinese economy, the shares of Heavy-Manufacture, Transport, Chemicals and Metals sectors continue to increase, while those high energy-exhaustive sectors witness their shares decreasing if the preference pattern of American consumers applies to Chinese economy in the Scen-US scenario. Otherwise, the shares of Transport and Chemicals in Scen-EU scenario will decline slightly if the preference pattern of EU consumers applies to Chinese economy; and in Scen_JP scenario the Transport sector’s share will rise and the Metals’ share will drop if the preference pattern of Japanese consumers applies to Chinese economy. It will manifest an inversed-U shape trend of the aggregated energy use of China, due to industrial structure change and energy efficiency improvement. The gross energy use in the Scen-China, Scen-EU, Scen-JP and Scen-US will considerably decline from 2810 Mtoe to 2166 Mtoe for the peak value of energy use. Therefore, the preference pattern of US consumers is relatively better than that of JP consumers, than that of EU consumers and that of Chinese consumers from the perspective of energy conservation and emission reduction. |
| Keywords: | China, Modeling: new developments, Optimization models |
| Date: | 2015–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:008007:8297&r=upt |
| By: | Gabaix, Xavier; Laibson, David |
| Abstract: | We assume that perfectly patient agents estimate the value of future events by generating noisy, unbiased simulations and combining those signals with priors to form posteriors. These posterior expectations exhibit as-if discounting: agents make choices as if they were maximizing a stream of known utils weighted by a discount function, D(t). This as-if discount function reflects the fact that estimated utils are a combination of signals and priors, so average expectations are optimally shaded toward the mean of the prior distribution, generating behavior that partially mimics the properties of classical time preferences. When the simulation noise has variance that is linear in the event's horizon, the as-if discount function is hyperbolic, D(t)=1/(1+at). Our agents exhibit systematic preference reversals, but have no taste for commitment because they suffer from imperfect foresight, which is not a self-control problem. In our framework, agents that are more skilled at forecasting (e.g., those with more intelligence) exhibit less discounting. Agents with more domain-relevant experience exhibit less discounting. Older agents exhibit less discounting (except those with cognitive decline). Agents who are encouraged to spend more time thinking about an intertemporal tradeoff exhibit less discounting. Agents who are unable to think carefully about an intertemporal tradeoff -- e.g., due to cognitive load -- exhibit more discounting. In our framework, patience is highly unstable, fluctuating with the accuracy of forecasting. |
| Keywords: | Behavioral economics; discounting; myopia |
| JEL: | D03 D14 E03 E23 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11914&r=upt |
| By: | Keshab Raj Bhattarai; Jonathan Haughton; David Tuerck |
| Abstract: | Income and income inequality increased substantially in the UK during the industrial revolution. Income inequality was the worst around 1880. This triggered enactments of more egalitarian tax and transfer system and halved the income inequality by the 1960s. Inequality has risen again with fiscal system reforms in the last five decades. As the taxes and transfers affect different categories of households and firms differently a multi-household multisectoral DCGE model of the UK and the US are appropriate modelling frameworks for such analyses. Providing such analysis for fairer system of taxes, apparently missing from the existing literature, is the main contribution of this paper.By analysing solutions of a dynamic computable general equilibrium (DCGE) model it is shown how policies could be designed for the optimal equitable paths of UK economy in the 21st century. We also found replacing the existing taxes by fair taxes to be favourable for growth and distribution in the US. Whether the growth enhancing and inequality reducing objectives could be achieved in the long run depends on the type of labour-leisure and consumption saving choices of low as well as the high income households and changes in the pattern of use of capital or labour input by firms in response to the public policies that often aim on achieving higher rate of growth with greater equality of income and utility for all types of UK households. It is also clear from the model that tax-reforms designed to tackle short-run problem have very detrimental effects on long run growth and may not be helpful in reducing the inequality in the distribution of income. Thus there is a clear trade-off between growth and equality. The greater equality in income alone does not automatically guarantee greater welfare for everyone no matter what the configuration of the social welfare function is. The bottom line is that the levels of consumption and utility cannot grow when the economy is not growing. |
| Keywords: | UK and USA, General equilibrium modeling, Public finance |
| Date: | 2015–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:008007:8607&r=upt |
| By: | PYO , Hak K. (Korea Institute for International Economic Policy); Song , Saerang (University of Wisconsin - Madison) |
| Abstract: | This research paper intends to redefine and extend the concept of 'optimal liquidity' discussed in Han and Lee (2012). For this purpose, we have distinguished between liquidity held by households and liquidity held by firms following Levhari and Patinkin (1968) and Yoo and Pyo (1986). Han and Lee (2012) have revised the 'money-in-utility' model by Walsh (2012) and derived the relationship between liquidity and consumption. In the present paper, we have extended Han and Lee (2012) to a 'money-in-utility-and-production' model. We have specified a DSGE model in which liquidity serves for both household utility and production input and have conducted the impulse-response analysis. The impulse-responses of most of important variables from the shock of TFP increase are consistent with the results of Bhattacharjee and Thoenissen (2007). On the other hand, the policy interest rate shows a hump-shaped impulse-response, which is consistent with the impulse response of monetary expansion in the cash-in-advance model. In addition, the increase in money supply has produced a kind of crowding-out effect reducing the share of liquidity held by firms. The main policy implication of our model is that not only the absolute level of optimal liquidity but also the relative distribution of the liquidity between households and firms are important determinant for economic growth and stability. In order to validate this proposition, we have conducted a panel regression analysis and have empirically verified the proposition that the relatively higher share of liquidity held by firms would contribute to both GDP growth and its stability. |
| Keywords: | Monetary Policy; Liquidity; DSGE; Panel Regression |
| JEL: | C32 E23 E40 |
| Date: | 2015–12–28 |
| URL: | http://d.repec.org/n?u=RePEc:ris:kiepwp:2015_002&r=upt |