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on Utility Models and Prospect Theory |
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Issue of 2018‒01‒08
24 papers chosen by |
| By: | Daniel Bartl; Patrick Cheridito; Michael Kupper |
| Abstract: | We study a robust expected utility maximization problem with random endowment in discrete time. We give conditions under which an optimal strategy exists and derive a dual representation of the optimal utility. Our approach is based on medial limits, a functional version of Choquet's capacitability theorem and a general representation result for monotone convex functionals. The novelty is that it works in cases where robustness is described by a general family of probability measures that do not have to be dominated or time-consistent. |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1712.07699&r=upt |
| By: | Jean-Pierre Drugeon (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Bertrand Wigniolle (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | A general setup is considered where agents are characterised by quasi-hyperbolic discounting and by heterogeneous bias for the present and heterogenous discounting parameters. Consumptions are moreover subject to a standard feasibility constraint. A collective utility function is defined as a function of the intertemporal utilities of the selves of the different agents, the elementary unit being thus the self of a given period for a given agent. The analysis is further specialized to time-independent collective utility functions. Such a framework generating a tension between Pareto-optimality and time-consistency for the optimal allocations, two approaches are suggested in order to tackle this issue. The first one imposes restrictions on the collective utility function that ensure the timeconsistency of the optimal decisions. The second one builds from an a priori time-inconsistent collective utility function. The benevolent planner is then to be considered as a sequence of successive incarnations, any of these incarnations being endowed with its own objective. The associated optimal policy is the equilibrium of a game between the successive incarnations of the planner when the players follow Markovian strategies. The results obtained for both solution concepts are compared through an example that also shows how they can be recovered through a competitive equilibrium. |
| Keywords: | Heterogeneities,hyperbolic discounting,collective choice |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-01662833&r=upt |
| By: | Andrei Matveenko |
| Abstract: | We study fundamental links between two popular approaches to consumer choice: the multinomial logit model of individual discrete choice and the CES utility function, which describes a multiple choice of a representative consumer. We base our analysis on the rational inattention (RI) model and show that the demand system of RI agents, each of which chooses a single option, coincides with the demand system of a fictitious representative agent with CES utility function. Thus, the multiple choice of the representative agent may be explained by the heterogeneity in signals received by the RI agents. We obtain a new interpretation for the elasticity of substitution and the weighting coeficients of the CES utility function. Specifically, we provide a correspondence between parameters of the CES utility function, prior knowledge and marginal cost of information. |
| Keywords: | discrete choice; rational inattention; CES utility function; multinomial logit; representative consumer; demand system; |
| JEL: | D40 D83 L11 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp593&r=upt |
| By: | Mongin, Philippe; Pivato, Marcus |
| Abstract: | We investigate the conflict between the ex ante and ex post criteria of social welfare in a novel axiomatic framework of individual and social decisions, which distinguishes between a subjective and an objective source of uncertainty. This framework permits us to endow the individuals and society not only with ex ante and ex post preferences, as is classically done, but also with interim preferences of two kinds, and correspondingly, to introduce interim forms of the Pareto principle. After characterizing the ex ante and ex post criteria, we present a first solution to their conflict that amounts to extending the former as much possible in the direction of the latter. Then, we present a second solution, which goes in the opposite direction, and is our preferred one. This solution combines the ex post criterion with an objective interim Pareto principle, which avoids the pitfalls of the ex ante Pareto principle, and especially the problem of "spurious unanimity" discussed in the literature. Both solutions translate the assumed Pareto conditions into weighted additive utility representations, and both attribute common individual probability values only to the objective source of uncertainty. |
| Keywords: | Ex ante social welfare; Ex post social welfare; Objective versus subjective uncertainty; Pareto principle; Separability; Harsanyi social aggregation theorem; Spurious unanimity |
| JEL: | D70 D81 |
| Date: | 2016–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:1154&r=upt |
| By: | Senda Ounaies (Centre d'Economie de la Sorbonne & Department of Mathematics - University El Manar Tunis); Jean-Marc Bonnisseau (Centre d'Economie de la Sorbonne - Paris School of Economics); Souhail Chebbi (Department of Mathematics - King Saud University) |
| Abstract: | In this paper, we consider a production economy with an unbounded attainable set where the consumers may have non-complete non-transitive preferences. To get the existence of an equilibrium, we provide an asymptotic property on preferences for the attainable consumptions and we use a combination of nonlinear optimization and fixed point theorem on truncated economies together with an asymptotic argument. We show that this condition holds true if the set of attainable allocations is compact or, when preferences are representable by utility functions, if the set of attainable individually rational utility levels is compact. This assumption generalizes the CPP condition of Allouch (2002) and covers the example of Page et al. (2000) when the attainable utility levels set is not compact. So we extend the previous existence results with non compact attainable sets in two ways by adding a production sector and considering general preferences |
| Keywords: | production economy; non compact attainable allocations; quasi-equilibrium; nonlinear optimization |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:16056r&r=upt |
| By: | Igor Halperin |
| Abstract: | Learning customer preferences from an observed behaviour is an important topic in the marketing literature. Structural models typically model forward-looking customers or firms as utility-maximizing agents whose utility is estimated using methods of Stochastic Optimal Control. We suggest an alternative approach to study dynamic consumer demand, based on Inverse Reinforcement Learning (IRL). We develop a version of the Maximum Entropy IRL that leads to a highly tractable model formulation that amounts to low-dimensional convex optimization in the search for optimal model parameters. Using simulations of consumer demand, we show that observational noise for identical customers can be easily confused with an apparent consumer heterogeneity. |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1712.04612&r=upt |
| By: | Thomas Garcia (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Sébastien Massoni (QuBE - School of Economics and Finance, Queensland University of Technology, Australian Centre for Entrepreneurship Research) |
| Abstract: | When making a decision under uncertainty, individuals aim to achieve opti-mality. In general, an accurate decision is optimal. However, in real life situations asymmetric stakes induce an unusual divergence between optimality and accuracy. We highlight this optimality-accuracy trade-off and study its origins using two experiments on perceptual decision making. We use Signal Detection Theory as a normative benchmark. The first experiment confirms the existence of an optimality-accuracy trade-off with a leading role of accuracy. The second experiment explains this trade-off by the concern of people for being right. Abstract When making a decision under uncertainty, individuals aim to make the best |
| Keywords: | Optimality, accuracy, signal detection theory, incentives, experiment |
| Date: | 2017–11–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01631540&r=upt |
| By: | Ketter, W.; Collins, J.; de Weerdt, M.M. |
| Abstract: | This is the specification for the Power Trading Agent Competition for 2018 (Power TAC 2018). Power TAC is a competitive simulation that models a “liberalized” retail electrical energy market, where competing business entities or “brokers” offer energy services to customers through tariff contracts, and must then serve those customers by trading in a wholesale market. Brokers are challenged to maximize their profits by buying and selling energy in the wholesale and retail markets, subject to fixed costs and constraints; the winner of an individual “game” is the broker with the highest bank balance at the end of a simulation run. Costs include fees for publication and withdrawal of tariffs, and distribution fees for transporting energy to their contracted customers. Costs are also incurred whenever there is an imbalance between a broker’s total contracted energy supply and demand within a given time slot. The simulation environment models a wholesale market, a regulated distribution utility, and a population of energy customers, situated in a real location on Earth during a specific period for which weather data is available. The wholesale market is a relatively simple call market, similar to many existing wholesale electric power markets, such as Nord Pool in Scandinavia or FERC markets in North America, but unlike the FERC markets we are modeling a single region, and therefore we approximate locational-marginal pricing through a simple manipulation of the wholesale supply curve. Customer models include households, electric vehicles, and a variety of commercial and industrial entities, many of which have production capacity such as solar panels or wind turbines. All have “real-time” metering to support allocation of their hourly supply and demand to their subscribed brokers, and all are approximate utility maximizers with respect to tariff selection, although the factors making up their utility functions may include aversion to change and complexity that can retard uptake of marginally better tariff offers. The distribution utility models the regulated natural monopoly that owns the regional distribution network, and is responsible for maintenance of its infrastructure. Real-time balancing of supply and demand is managed by a market-based mechanism that uses economic incentives to encourage brokers to achieve balance within their portfolios of tariff subscribers and wholesale market positions, in the face of stochastic customer behaviors and weather-dependent renewable energy sources. Changes for 2018 are focused on stability, on simplifying interaction with the balancing market, and on encouraging more vigorous competition, and are highlighted by change bars in the margins. See Sections 3.1.2, 6, and 8.5 for details. |
| Keywords: | Autonomous Agents, Electronic Commerce, Energy, Preferences, Portfolio Management, Power, Policy Guidance, Sustainability, Trading Agent Competition |
| Date: | 2017–12–13 |
| URL: | http://d.repec.org/n?u=RePEc:ems:eureri:103283&r=upt |
| By: | Eva Ranehill; Roberto A. Weber |
| Abstract: | Many studies document systematic gender differences in a variety of important economic preferences, such as risk-taking, competition and pro-sociality. One potential implication of this literature is that increased female representation in decision-making bodies may significantly alter organizational and policy outcomes. However, research has yet to establish a direct connection from gender differences in simple economic choice tasks, to voting over policy and to the resulting outcomes. We conduct a laboratory experiment to provide a test of such a connection. In small laboratory “societies,” people repeatedly vote for a redistribution policy and engage in a real-effort production task. Women persistently vote for more egalitarian redistribution. This gender difference is large relative to other voting differences based on observable characteristics and is partly explained by gender gaps in preferences and beliefs. Gender voting gaps persist with experience and in environments with varying degrees of risk. We also observe policy differences between male- and female-controlled groups, though these are considerably smaller than the mean individual differences—a natural consequence of the aggregation of individual preferences into collective outcomes. Thus, we provide evidence for why substantial and robust gender differences in preferences may often fail to translate into differential policy outcomes with increased female representation in policymaking. |
| Keywords: | gender differences, risk, altruism, redistributive preferences, experiment |
| JEL: | C91 C92 J16 H23 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6776&r=upt |
| By: | Bianchi, Milo; Tallon, Jean-Marc |
| Abstract: | We match administrative panel data on portfolio choices with survey data on preferences over ambiguity. We show that ambiguity averse investors bear more risk, due to a lack of diversiÖcation. In particular, they exhibit a form of home bias that leads to higher exposure to the domestic relative to the international stock market. While more sensitive to market factors, their returns are on average higher, suggesting that ambiguity averse investors need not be driven out of the market for risky assets. We also show that these investors rebalance their portfolio more actively and in a contrarian direction relative to past market trends, which allow them to keep their risk exposure relatively constant over time. We discuss these Öndings in relation to the theoretical literature on portfolio choice under ambiguity. |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:32196&r=upt |
| By: | Hautsch, Nikolaus; Voigt, Stefan |
| Abstract: | We theoretically and empirically study large-scale portfolio allocation problems when transaction costs are taken into account in the optimization problem. We show that transaction costs act on the one hand as a turnover penalization and on the other hand as a regularization, which shrinks the covariance matrix. As an empirical framework, we propose a flexible econometric setting for portfolio optimization under transaction costs, which incorporates parameter uncertainty and combines predictive distributions of individual models using optimal prediction pooling. We consider predictive distributions resulting from highfrequency based covariance matrix estimates, daily stochastic volatility factor models and regularized rolling window covariance estimates, among others. Using data capturing several hundred Nasdaq stocks over more than 10 years, we illustrate that transaction cost regularization (even to small extent) is crucial in order to produce allocations with positive Sharpe ratios. We moreover show that performance differences between individual models decline when transaction costs are considered. Nevertheless, it turns out that adaptive mixtures based on high-frequency and low-frequency information yield the highest performance. Portfolio bootstrap reveals that naive 1=N-allocations and global minimum variance allocations (with and without short sales constraints) are significantly outperformed in terms of Sharpe ratios and utility gains. |
| Keywords: | portfolio choice,transaction costs,model uncertainty,regularization,high frequency data |
| JEL: | C58 C52 C11 G11 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:582&r=upt |
| By: | Schroyen, Fred (Dept. of Economics, Norwegian School of Economics and Business Administration); Aarbu, Karl Ove (Tryg Forsikring) |
| Abstract: | Using survey data and the instrument developed by Barsky et al.(1997), we estimate the distribution of attitudes towards income risk in a country where many employment and health-related risks are generously covered by a tax …financed social insurance system (Norway 2006) . Under a CRRA assumption, the sample average for the coefficient of relative risk aversion is 3.8 with a standard deviation of 2.3. This number is then contrasted to that for five other OECD countries where risk attitudes have been measured using the same instrument and also prior to the financial crisis: Chile, France, Italy, The Netherlands and the US. When we relate this distribution for stated relative risk aversion to that for generosity of social insurance and the risks related to employment and Health expenditure, a picture emerges suggesting that more extensive welfare states induce higher risk tolerance for foreground risks-–a- relationship that is in line with the theory on risk vulnerability. |
| Keywords: | Risk aversion; stated preferences; income lotteries; background risk; risk vulnerability; welfare state. |
| JEL: | D12 D81 |
| Date: | 2017–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhheco:2017_020&r=upt |
| By: | Bruno Feunou; Ricardo Lopez Aliouchkin; Roméo Tedongap; Lai Xi |
| Abstract: | We decompose total variance into its bad and good components and measure the premia associated with their fluctuations using stock and option data from a large cross-section of firms. The total variance risk premium (VRP) represents the premium paid to insure against fluctuations in bad variance (called bad VRP), net of the premium received to compensate for fluctuations in good variance (called good VRP). Bad VRP provides a direct assessment of the degree to which asset downside risk may become extreme, while good VRP proxies for the degree to which asset upside potential may shrink. We find that bad VRP is important economically; in the cross-section, a one-standard-deviation increase is associated with an increase of up to 13% in annualized expected excess returns. Simultaneously going long on stocks with high bad VRP and short on stocks with low bad VRP yields an annualized risk-adjusted expected excess return of 18%. This result remains significant in double-sort strategies and cross-sectional regressions controlling for a host of firm characteristics and exposures to regular and downside risk factors. |
| Keywords: | Asset Pricing, Financial markets |
| JEL: | G12 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:17-58&r=upt |
| By: | Loic Berger; Massimo Marinacci |
| Abstract: | We review recent models of choices under uncertainty that have been proposed in the economic literature. The framework that we propose is general and may be applied in many different fields of environmental economics. To illustrate, we provide a simple application in the context of an optimal mitigation policy. Our objective is to offer guidance to policy makers who face uncertainty when designing climate policy. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:616&r=upt |
| By: | Ryan W. Buell (Harvard Business School, Technology and Operations Management Unit) |
| Abstract: | This paper investigates whether people exhibit last place aversion in queues and its implications for their experiences and behaviors in service environments. An observational analysis of customers queuing at a grocery store, and three online field experiments in which participants waited in virtual queues, revealed that waiting in last place diminishes wait satisfaction while increasing the probabilities of switching and abandoning queues. After controlling for other factors, people in last place were more than twice as likely to switch queues, which increased the duration of their wait and diminished their overall satisfaction. Moreover, people in last place were more than four times more likely to renege from queues, altogether giving up on the service for which they were queuing. The results indicate that this behavior is partially explained by the inability to make a downward social comparison; namely, when no one is behind a queuing individual, that person is less certain that continuing to wait is worthwhile. Furthermore, this paper provides evidence that queue transparency is an effective service design lever that managers can use to reduce the deleterious effects of last place aversion in queues. When people can't see that they're in last place, the behavioral effects of last place aversion are nullified, and when they can see that they're not in last place, the tendency to renege is greatly diminished. |
| Keywords: | Behavioral operations, queues, reference effects, last place aversion, transparency |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:hbs:wpaper:18-053&r=upt |
| By: | Magdalena Brzozowicz (Faculty of Economic Sciences, University of Warsaw); Michał Krawczyk (Faculty of Economic Sciences, University of Warsaw); Przemysław Kusztelak (Faculty of Economic Sciences, University of Warsaw) |
| Abstract: | In two field experiments the authors elicit willingness to pay for a mascara, systematically manipulating incentives to provide the true valuation (hypothetical vs. real) and anchors (high vs. low or high vs. none). Contrary to the key hypothesis, they find no interaction between the two effects: the anchoring effect is not attenuated when decisions actually matter. This finding speaks to validity of hypothetical market research methods and against the use of anchors to reduce hypothetical bias. It also contributes to the discussion of the mechanism underlying anchoring effect, suggesting it is not caused by insufficient conscious effort to drift away from the anchor. |
| Keywords: | anchoring effect, hypothetical bias, WTP, experiment |
| JEL: | D03 D91 M31 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:war:wpaper:2017-24&r=upt |
| By: | Hermann, Daniel; Mußhoff, Oliver; Rau, Holger A. |
| Abstract: | The disposition effect is a well-established phenomenon which describes the behavior of investors that are more willing to sell capital gains than capital losses. In this article we present experimental evidence on a situation where an investor decides on behalf of another person. In our setting, trading effort should only be affected by investors' intrinsic motivation, as trading actions only influence the profits of a matched person. In a control treatment, trades directly influence investors' profits. Overall, we find that trading on behalf of others increases disposition effects. In this treatment, we find that the effect is caused by inexperienced investors, characterized by a greater concern for others. Thus, trading for others results in an emotional burden for these investors, which leads to weak trading performance. |
| Keywords: | disposition effect,experiment,decisions on behalf of others,social value orientation,loss aversion |
| JEL: | C91 D14 D81 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cegedp:332&r=upt |
| By: | Daske, Thomas |
| Abstract: | How agents assess the (in-)tangible externalities that others might impose on them can strongly influence strategic interaction. This study explores mechanism design for agents whose externality assessments and private payoffs, exclusive of externalities, are all subject to asymmetric information; utility is quasi-linear and transferable. An allocation rule will be called strongly Bayesian implementable if it is Bayesian implementable for arbitrary type distributions. Under reasonable assumptions, the following result is established: A Paretian allocation rule is strongly Bayesian implementable through budget-balanced transfers if and only if it maximizes the sum of private payoffs exclusive of externalities. The corresponding mechanism is necessarily externality-robust in that it leaves agents' externality assessments strategically inoperative. The result emphasizes the critical incentive-theoretical role of the welfare judgment inherent to social choice. Strong Bayesian implementation of a welfare judgment inconsistent with externality-ignoring utilitarianism violates budget balance and thus entails incentive costs. |
| Keywords: | (behavioral) mechanism design,externalities,robust implementation,social welfare,bargaining |
| JEL: | C70 C72 D62 D63 D82 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:172494&r=upt |
| By: | Lyócsa, Štefan; Výrost, Tomáš; Baumöhl, Eduard |
| Abstract: | We test a sample of 3,586 banks from 33 European countries to determine whether performances above or below a social aspiration level (median performance of peer banks) influence banks’ aggregate risk levels. Our results are consistent with the behavioral theory of the firm and prospect theory in that we find that bank performance below a bank’s social aspiration level is followed by increased aggregate risk, i.e., risk-taking behavior in the subsequent year. Although under-performing banks tend to be risk-takers, large banks and banks with high aggregate risk levels tend to limit the increase in their aggregate risk levels. |
| Keywords: | social aspiration,European banks,performance,risk behavior,prospect theory |
| JEL: | D22 G2 L22 L25 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:172510&r=upt |
| By: | Gleb Koshevoy; Ernesto Savaglio |
| Abstract: | We analyse the rationality of a Decision Maker (DM) who chooses from lists of sets of alternatives. We show that the DM's choice behaviour, rep-resented by a choice function f dened on such lists, can be `improved' bya two-step procedure. We rst construct the list-envelop of f that is the union of all choice sets induced by f on every possible partition (lists) of a set of alternatives. Then, we take among the list-envelop choice functionsthose that are Plott functions (see [4]) and characterize such a family by using a suitable property, allowing a DM to disregard alternatives that are worthless for the choice process. Then, using a rule that breaks the ties that could occur in every choice set, we characterize the set of Plott functions that has a prescribed shelling (see (5) below) of the choice sets. Finally, we study the 'relational system' that satises some compelling properties and rationalizes the class of choice functions studied in the present work. |
| Keywords: | Envelop Choice Function, Plott function, Sequential Rationality, Path-independency, Shuffle of Linear Orders |
| JEL: | D01 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:usi:wpaper:765&r=upt |
| By: | Xavier Gabaix |
| Abstract: | Inattention is a central, unifying theme for much of behavioral economics. It permeates such disparate fields as microeconomics, macroeconomics, finance, public economics, and industrial organization. It enables us to think in a rather consistent way about behavioral biases, speculate about their origins, and trace out their implications for market outcomes. This survey first discusses the most basic models of attention, using a fairly unified framework. Then, it discusses the methods used to measure attention, which present a number of challenges on which much progress has been done. It then examines the various theories of attention, both behavioral and more Bayesian. It finally discusses some applications. For instance, inattention offers a way to write a behavioral version of basic microeconomics, as in consumer theory, producer theory, and Arrow-Debreu. A last section is devoted to open questions in the attention literature. This chapter is a pedagogical guide to the literature on attention. Derivations are self-contained. |
| JEL: | D03 D11 D51 G02 H2 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24096&r=upt |
| By: | Jørgen Vitting Andersen (Centre d'Economie de la Sorbonne); Roy Cerqueti (University of Macerata, Department of Economics and Law - Italy); Giulia Rotundo (Sapienza University of Rome, Department of Economics, Italy) |
| Abstract: | This paper proposes a stochastic model for describing rational expectations. The context is systemic risk, with interconnected components of a unified system. The evolution dynamics leading to the failure of the system is explored either under a theoretical point of view as well as through an extensive scenario analysis |
| Keywords: | Rational expectation; stochastic system; systemic risk; evolutionary economics |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:17060&r=upt |
| By: | Thaler, Richard H. (University of Chicago) |
| Abstract: | Richard H. Thaler delivered his Prize Lecture on 8 December 20167 at the Aula Magna, Stockholm University. |
| Keywords: | Behavioral economics; |
| JEL: | D03 D90 G02 |
| Date: | 2017–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:ris:nobelp:2017_003&r=upt |
| By: | Escudé, Guillermo J. |
| Abstract: | This essay is meant as a contribution towards the integration of ‘the social sciences’ into a ‘science of human society’. For this it uses concepts and methods that economics has developed, but also questions the adequacy of mainstream economic theory in two aspects: a) the absence of a hierarchical class structure and consequent inter-class conflicts of interest, and b) the ‘benevolent government' or ‘social planner' approach to policy decisions. I construct three simple models where the first two are basically building blocks for the third. The first is a model of slaves and masters, the second of governed (clans) and governors and the third of capitalism (salaried workers, capitalist entrepreneurs, and governors). In each model, the agent(s) that have a higher rank in the hierarchy have the power to condition the decision rules of those below in a way that is similar to Stackelberg’s modeling of leader and follower firms within an oligopolistic industry. All agents in the model face a consumption/toil tradeoff. They have the same utility function albeit with class-specific parameters. The second model introduces public goods in consumption, which may have a negative impact on utility (public bads) for the governed, generating conflicting interests between the two classes. In each model, the agents deciding on the production of goods exert Planning, Organizing, Commanding and Controlling (POCC) work effort that enhances production but yields disutility. In the last two models the governing class exerts POCC work effort in the production of public goods and in the taxation necessary to finance it as well as its own consumption. The third model extends a basic model of monopolistic competition to include the Government and POCC work effort in the production of private and public goods. The distribution of income in terms of private goods is seen to depend entirely on decisions made by the upper class in the hierarchy. A more sophisticated distribution of ‘welfare’ could show much greater inequality due to possibly high levels of disutility due to public output which are public bads for workers but public goods for the upper classes. The framework is meant as a first approximation to a realistically more complex process where lower level classes have some degree of countervailing power (including elections, strikes, demonstrations, etc.). But that closer approximation could be modeled in different ways and would only modify the basic power structure reflected in the approximate model ‘in the margin’. RESUMEN Este ensayo pretende contribuir a la integración de ‘las ciencias sociales’ en una ‘ciencia de la sociedad humana’. Para ello usa conceptos y métodos que ha desarrollado la economía pero también cuestiona a la economía del mainstream en dos aspectos: a) la ausencia de una estructura jerárquica de clases y de conflictos de intereses inter-clases, y b) el enfoque del ‘gobierno benévolo’ o ‘planificador social’ para las decisiones de política. Construyo tres modelos sencillos de complejidad creciente. El primero es de esclavos y esclavistas, el segundo de (clanes) gobernados y gobernantes, y el tercero de capitalismo (asalariados, empresarios, y gobernantes). En cada modelo los agentes de mayor rango tienen el poder de condicionar las reglas decisorias de quienes están más abajo. Esto tiene similitud con la modelación de Stackelberg de empresas líderes y seguidoras en oligopolio. Todos los agentes confrontan un tradeoff consumo/esfuerzo y tienen la misma función de utilidad aunque con parámetros clase-específicos. El segundo modelo introduce los bienes públicos en el consumo, los que pueden tener impacto negativo sobre la utilidad (males públicos) de los gobernados, generando conflicto de intereses entre clases. En cada modelo los agentes que deciden sobre la producción ejercen trabajo de Planificación, Organización, Comando, y Control (POCC) que aumenta la producción pero brinda desutilidad. En los dos últimos modelos la clase gobernante ejerce trabajo POCC en la producción de bienes públicos y en la recaudación tributaria que lo financia, así como su consumo. El tercer modelo es extensión del modelo de competencia monopolística estándar que incluye el Gobierno y el trabajo POCC en la producción de bienes privados y públicos. Se muestra que la distribución del ingreso en términos de bienes privados depende de las decisiones tomadas por los gobernantes. Una distribución de ‘bienestar’ mostraría mayor desigualdad debido a las posibles desutilidades generadas por productos públicos que son males públicos para trabajadores pero bienes públicos para las clases altas. Se concibe este marco como primera aproximación de un proceso más complejo en que las clases inferiores tienen algún grado de poder contestatario (incluyendo elecciones, huelgas, manifestaciones, etc.) Pero esa mayor aproximación puede ser modelada de diferentes maneras y sólo modificaría la estructura de poder básica del modelo aproximado ‘en el margen’. |
| Keywords: | Hierarchical control, Public goods, Social classes, Governance, |
| JEL: | B41 B51 Y80 Z13 Z18 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:83175&r=upt |